The Network Factor of Equity Pricing: A Signed Graph Laplacian Approach

Authors

Ajim Uddin, New Jersey Institute of Technology
Xinyuan Tao, New Jersey Institute of Technology
Dantong Yu, New Jersey Institute of Technology

Document Type

Article

Publication Date

1-1-2024

Abstract

The connections among firms exhibit heterogeneity, complexity, and dynamism, posing a challenge for traditional unsigned network models. This article proposes a signed graph Laplacian approach to construct a dynamic network index (DNI), quantifying the aggregate changes in the market network over time. A larger DNI indicates more significant changes in firms' interconnectedness and in the market network structure. Firms with higher sensitivity to DNI exhibit lower expected returns. Incorporating DNI into conventional asset pricing models improves return predictability. Results are robust for multiple estimators, various factor models, and different selections of test assets. Our findings suggest that the network factor generates a significant equity risk premium.

Identifier

85210272983 (Scopus)

Publication Title

Journal of Financial Econometrics

External Full Text Location

https://doi.org/10.1093/jjfinec/nbae010

e-ISSN

14798417

ISSN

14798409

First Page

1616

Last Page

1655

Issue

5

Volume

22

Recommended Citation

Uddin, Ajim; Tao, Xinyuan; and Yu, Dantong, "The Network Factor of Equity Pricing: A Signed Graph Laplacian Approach" (2024). Faculty Publications. 795.
https://digitalcommons.njit.edu/fac_pubs/795