Professor of Finance
JEL Classification; G12; G15; G32; International Asset Pricing; Business Groups; Centrality; Co-Movement;
Firms in global markets often belong to business groups. The authors 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.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor.Based on a novel data set of worldwide ownership for 2002–2012, the authors 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.