Network Centrality and the Cross Section of Stock Returns

Abstract

Industries that are more central in the network of intersectoral trade earn higher stock returns than industries that are less central. To explain this finding, I argue that stocks in more central industries have greater market risk because they have greater exposure to sectoral shocks that transmit from one industry to another through intersectoral trade. Consistent with this argument, stock returns of central industries covary more closely with market returns and future consumption growth. In addition, the empirical evidence suggests that sectoral shocks that contribute to aggregate risk are more likely to pass through central industries than peripheral industries.