Financial Contagion in Network Economies and Asset Prices

62 Pages Posted: 21 Nov 2017 Last revised: 7 Jun 2021

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Claudio Tebaldi

Bocconi University - CAREFIN - Centre for Applied Research in Finance; Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: November 19, 2017

Abstract

This paper studies intertemporal asset pricing in network economies when distress shocks can propagate through the network, similarly to epidemic outbreaks. Two classes of equilibria exist. In the first, idiosyncratic shocks are diversifi able and don't affect valuations: CCAPM applies. In the second, idiosyncratic shocks generate non-diversifi able long-run cascades of shocks ( financial pandemics) that introduce a new risk premium component unexplained by traditional systematic factors. We derive closed-solutions for asset prices as a function of the network properties and discuss their properties. After a structural break (1984), we find evidence of a network risk premium that is statistically and economically signifi cant.

Keywords: Network, asset pricing, systemic risk, contagion, epidemics, cascades

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Tebaldi, Claudio, Financial Contagion in Network Economies and Asset Prices (November 19, 2017). Available at SSRN: https://ssrn.com/abstract=3074012 or http://dx.doi.org/10.2139/ssrn.3074012

Andrea Buraschi (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Claudio Tebaldi

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Roentgen 1
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

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