Multiple Channels of Financial Contagion: A Network-Based Econometric Approach

Ecisions and outcomes of financial firms are often influenced by different types of network associations. Prior research to assess the roots of financial contagion has focused on a single channel linked to supply-chain network. Firm-level interactions in practice, however, heavily depend on other channels (such as competition linkages and business partnerships), which expand the sources of micro-induced systemic risk, volatility and stock return predictability. Drawing on the view that financial propagation occurs through multidimensional linkages between economically-related companies, this study develops a network-based econometric approach to characterize the stock price dynamics connected by supply-chain, competition and partnership linkages. We derive a number of theoretical properties of our model which reveals rich insights on endogenous feedback mechanism as well as shock amplification patterns consistent with the stylized facts. Using comprehensive firm-level network data on 7256 U.S. listed enterprises, we document that stock prices are significantly exposed to network propagation operating through competition and partnership channels apart from the supply-chain linkages. The empirical evidence reveals that the impact of network factors on prices is sizeable, time-varying and asymmetric over the business cycle during normal versus crisis periods.

(joint work with Stefano Nasini)