Working Paper

Firm Networks and Asset Returns

Abstract: 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.

Keywords: Asset returns; Firm networks; Shock propagation;

JEL Classification: C02; C6; D53; E32; G12; L10;

https://doi.org/10.17016/FEDS.2017.014r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2017-02-23

Number: 2017-014

Pages: 80 pages