Networks in Production: Asset Pricing Implications

Abstract

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.

The externalities of credit default swaps on stock return synchronicity

“…We exclude records for which we cannot find a definite, clear match through this screening and selection methodology. Similar supply–chain datasets are used by Fee and Thomas (), Guan et al (), Li and Tang (), and Herskovic (). This procedure generates a data set with fiscal year, supplier identity, customer identity, and yearly sales.…”

Upstream, Downstream & Common Firm Shocks

“…Herskovic (2018) also studies the asset pricing implications of sectoral input-output networks, finding return spreads of 4.6% and -3.2% per year on sparsity and concentration beta-sorted portfolios.…”

Inter-firm Relationships and Asset Prices

“…Kung and Schmid (2015) shows that a model of endogenous innovation and R&D is able to generates long-run risks, while Bidder and DewBecker (2016) shows that long-run risks arise in an economy in which investors are pessimistic and not sure about the true model driving the economy. 9 In such an environment, equilibrium asset prices are similar to the ones obtained here if the representative investor has preferences over a particular basket of goods, e.g., Herskovic (2015).…”

“…This paper contributes to three strands of the literature. First, the paper develops a new theoretical framework that adds to a growing body of work focused on understanding the effects of economic linkages in asset pricing properties, e.g., Buraschi and Porchia (2012), Ahern (2013), and Herskovic (2015). 7 Unlike these papers, my model emphasizes relationships at the firm level to explore the asset pricing properties that stem from the propagation of shocks within production networks.…”

“…Using the network of intersectoral trade, Ahern (2013) provides evidence that firms in more central industries have greater exposure to systematic risk. Herskovic (2015) focuses on efficiency gains that come from changes in the input-output network and how those changes are priced in equilibrium. My paper, on the other hand, focuses on how changes in the propagation of shocks within a fixed network alter equilibrium asset prices and risk premia.…”