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International Asset Pricing with Strategic Business Groups

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  • Massa, Massimo
  • O'Donovan, James
  • Zhang, Hong

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.

Suggested Citation

  • Massa, Massimo & O'Donovan, James & Zhang, Hong, 2021. "International Asset Pricing with Strategic Business Groups," CEPR Discussion Papers 15746, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15746
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    Keywords

    International asset pricing; Business groups; Centrality; Co-movement;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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