Working Paper: CEPR ID: DP15746
Authors: Massimo Massa; James O'Donovan; Hong Zhang
Abstract: Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” The ensuing hedging demand induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel dataset of worldwide ownership for 2002-2012, we find that central firms are better protected in bad times and that they earn relatively lower-expected returns. Moreover, a centrality factor augments traditional models in explaining the cross-section of international stock returns.
Keywords: international asset pricing; business groups; centrality; comovement
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic behavior of business groups (L21) | alters expected risk premium (D81) |
| centrality (D80) | protection during economic downturns (G52) |
| centrality (D80) | lower sensitivity to negative industry shocks (L16) |
| centrality (D80) | lower expected returns (G12) |
| centrality (D80) | influence on asset pricing (G19) |
| centrality (D80) | new intertemporal risk factor (D15) |