Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/150016
Authors: 
Billio, Monica
Caporin, Massimiliano
Panzica, Roberto Calogero
Pelizzon, Loriana
Year of Publication: 
2017
Series/Report no.: 
SAFE Working Paper Series 166
Abstract: 
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.
Subjects: 
CAPM
volatility
network
interconnections
systematic risk
JEL: 
G10
G12
F35
C58
Document Type: 
Working Paper

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