{"title":"Product network and origin of common equity factor risks","authors":"Yan Shi , Zili Zhang , Xuejun Zhao","doi":"10.1016/j.pacfin.2024.102510","DOIUrl":null,"url":null,"abstract":"<div><p>This paper extends the multisector asset pricing model based on production networks, achieving direct pricing of a firm’s equity assets at a more microscopic level within the product network. An Equilibrium-Aligned PageRank (EA-PR) centrality algorithm is proposed, and it is theoretically proven that EA-PR centrality can reflect the relative value of products and further derive the value of firms. A new equity asset pricing factor is constructed based on the EA-PR centrality of firms. The key findings can be summarized as follows: Firstly, the EA-PR centrality of firms shows a significant positive linear predictability for equity returns, and the returns associated with the EA-PR centrality factor cannot be fully explained by the Fama–French 6 (FF6) factors. Secondly, the EA-PR centrality factor demonstrates significant explanatory power for the FF6 factors and, to some extent, exhibits predictive ability for future returns of the FF6 factors. Thirdly, the product network model can effectively reflect the market competitiveness and growth potential of firms, and firms with high EA-PR centrality have stronger value capture capabilities, improving gross profit margin, cash flow, and investment growth in the future. Finally, this study empirically demonstrates the consistency between the product network model and the pricing theory of the <span><math><msup><mrow><mi>q</mi></mrow><mrow><mn>5</mn></mrow></msup></math></span> model, which incorporates the expected growth factor.</p></div>","PeriodicalId":48074,"journal":{"name":"Pacific-Basin Finance Journal","volume":null,"pages":null},"PeriodicalIF":4.8000,"publicationDate":"2024-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Pacific-Basin Finance Journal","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0927538X24002622","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper extends the multisector asset pricing model based on production networks, achieving direct pricing of a firm’s equity assets at a more microscopic level within the product network. An Equilibrium-Aligned PageRank (EA-PR) centrality algorithm is proposed, and it is theoretically proven that EA-PR centrality can reflect the relative value of products and further derive the value of firms. A new equity asset pricing factor is constructed based on the EA-PR centrality of firms. The key findings can be summarized as follows: Firstly, the EA-PR centrality of firms shows a significant positive linear predictability for equity returns, and the returns associated with the EA-PR centrality factor cannot be fully explained by the Fama–French 6 (FF6) factors. Secondly, the EA-PR centrality factor demonstrates significant explanatory power for the FF6 factors and, to some extent, exhibits predictive ability for future returns of the FF6 factors. Thirdly, the product network model can effectively reflect the market competitiveness and growth potential of firms, and firms with high EA-PR centrality have stronger value capture capabilities, improving gross profit margin, cash flow, and investment growth in the future. Finally, this study empirically demonstrates the consistency between the product network model and the pricing theory of the model, which incorporates the expected growth factor.
期刊介绍:
The Pacific-Basin Finance Journal is aimed at providing a specialized forum for the publication of academic research on capital markets of the Asia-Pacific countries. Primary emphasis will be placed on the highest quality empirical and theoretical research in the following areas: • Market Micro-structure; • Investment and Portfolio Management; • Theories of Market Equilibrium; • Valuation of Financial and Real Assets; • Behavior of Asset Prices in Financial Sectors; • Normative Theory of Financial Management; • Capital Markets of Development; • Market Mechanisms.