The impact of network connectivity on factor exposures, asset pricing and portfolio diversification

Arbeitspapier

This paper extends the classic factor-based asset pricing model by including network linkages in linear factor models. We assume that the network linkages are exogenously provided. This extension of the model allows a better understanding of the causes of systematic risk and shows that (i) network exposures act as an inflating factor for systematic exposure to common factors and (ii) the power of diversification is reduced by the presence of network connections. Moreover, we show that in the presence of network links a misspecified traditional linear factor model presents residuals that are correlated and heteroskedastic. We support our claims with an extensive simulation experiment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 166

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates ; Foreign Aid ; Financial Econometrics
• Subject: CAPM ; volatility ; network ; interconnections ; systematic risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Billio, Monica ; Caporin, Massimiliano ; Panzica, Roberto Calogero ; Pelizzon, Loriana
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2017

Further information

• DOI: doi:10.2139/ssrn.2914218
• Handle: http://hdl.handle.net/10419/150016
• URN: urn:nbn:de:hebis:30:3-428360
• Last update: 10.03.2025, 11:42 AM CET