Finance and Economics Discussion Series (FEDS)
February 2017 (Revised February 2018)
Firm Networks and Asset Returns
This paper argues that changes in the propagation of idiosyncratic shocks along firm networks are important to understanding variations in asset returns. When calibrated to match key features of supplier-customer networks in the United States, an equilibrium model in which investors have recursive preferences and firms are interlinked via enduring relationships generates long-run consumption risks. Additionally, the model matches cross-sectional patterns of portfolio returns sorted by network centrality, a feature unaccounted for by standard asset pricing models.
Accessible materials (.zip)
Original paper: PDF | Accessible materials (.zip)
Keywords: Equilibrium asset prices, Inter-firm relationships, Networks, Shock propagation
PDF: Full Paper