Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225335 
Year of Publication: 
2020
Series/Report no.: 
SAFE Working Paper No. 74
Version Description: 
July 30, 2020
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
Directed links in cash flow networks a↵ect the cross-section of risk premia through three channels. In a tractable consumption-based equilibrium asset pricing model, we obtain closed-form solutions that disentangle these channels for arbitrary directed networks. First, shocks that can propagate through the economy command a higher market price of risk. Second, shock-receiving assets earn an extra premium since their valuation ratios drop upon shocks in connected assets. Third, a hedge e↵ect pushes risk premia down: when a shock propagates through the economy, an asset that is unconnected becomes relatively more attractive and its valuation ratio increases.
Subjects: 
Directed cash flow networks
directed shocks
mutually exciting processes
recursive preferences
JEL: 
G12
D85
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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