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. I find a return spreads of 6% and -4% per year on sparsity and concentration beta-sorted portfolios, respectively. A calibrated model matches the network factor betas and return spreads alongside other asset pricing moments.