This paper extends the classic factor-based asset pricing model by including network linkages, leading to a network-augmented linear factor model. This extension of the model allows a better understanding of the determinants of systematic risk and shows that cross-sectional risk premia can be estimated more precisely. Moreover, we demonstrate 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 and real data.
The impact of network connectivity on factor exposures, asset pricing, and portfolio diversification
Caporin M.;
2023
Abstract
This paper extends the classic factor-based asset pricing model by including network linkages, leading to a network-augmented linear factor model. This extension of the model allows a better understanding of the determinants of systematic risk and shows that cross-sectional risk premia can be estimated more precisely. Moreover, we demonstrate 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 and real data.File in questo prodotto:
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