Inter-firm Relationships and Asset Prices

Abstract

This paper proposes a novel link between the propagation of shocks within production networks and asset prices. It develops a dynamic network model in which the propagation of firm cash-flow shocks via inter-firm relationships affects the economy's equilibrium asset prices. When calibrated to match key features of customer-supplier networks in the United States, the model generates long-run risks, high and volatile risk premia, and a low and stable risk-free rate. Consistent with data from firms in manufacturing and service industries, the model predicts that central firms in the network command lower risk premiums than peripheral firms, and that firm-level return volatilities exhibit a high degree of co-movement.

The Origins of Aggregate Fluctuations in a Credit Network Economy

“…Figure 7 plots the time series of aggregate industrial production during the Great Recession, as well as a simulation for each of its components. 39 These counterfactual series are constructed by feeding each of the estimated components through the model one at a time, and thus represents how aggregate industrial production would have evolved in the During the recession, productivity shocks had virtually no adverse effects on industrial production -in fact, they actually mitigated the downturn. Rather, financial shocks are the main culprit, accounting for two-thirds of the peak-to-trough drop in aggregate industrial production during the recession.…”