Network centrality, information diffusion and asset pricing

Abstract

This paper empirically investigates the asset pricing implications of trade network topology in the Australian equity market, emphasizing its role in economic shock propagation and information dissemination. We explore the influence of industries' network positions on the paradigm of risk and return. Empirical results demonstrate that industries located in the centre of the trade network, benefiting from diversified trade relations, yield lower returns without heightened exposure to systematic risk. Exploring the interplay between network centrality and information diffusion, we find that information transmission is slower among central firms due to attention constraints of investors and the complexity involved in analyzing them.