Networks in Production: Asset Pricing Implications
42 Pages Posted: 9 Jun 2015 Last revised: 8 Aug 2018
Date Written: April 1, 2017
In this paper, I examine asset pricing in a multisector model with sectors connected through an input-output network. Changes in the network are sources of systematic risk reflected in equilibrium asset prices. Two characteristics of the network matter for asset prices: network concentration and network sparsity. These two production-based asset pricing factors are determined by the structure of the network and are computed from input-output data. Consistent with the model predictions, I find return spreads of 4.6% and -3.2% per year on sparsity and concentration beta-sorted portfolios, respectively.
Keywords: Networks, Input-Output, Systematic Risk
JEL Classification: G12, G11, E13, E16
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