This paper extends the classic factor-based asset pricing model by including network linkages, leading to a network-augmented linear factor model. This extension of the model allows a better understanding of the determinants of systematic risk and shows that cross-sectional risk premia can be estimated more precisely. Moreover, we demonstrate that in the presence of network links a misspecified traditional linear factor model presents residuals that are correlated and heteroscedastic. We support our claims with an extensive
simulation experiment and real data.
BILLIO Monica;
CAPORIN Massimiliano;
PANZICA Roberto;
PELIZZON Loriana;
2022-12-12
ELSEVIER
JRC131553
1059-0560 (online),
https://www.sciencedirect.com/science/article/pii/S1059056022002702?via%3Dihub,
https://publications.jrc.ec.europa.eu/repository/handle/JRC131553,
10.1016/j.iref.2022.11.002 (online),
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