Financial contagion risk and the stochastic discount factor

摘要

I provide evidence that financial contagion risk is an important source of the equity risk premium. Banks' contributions to aggregate financial contagion are estimated in a state space framework and linked to systemic risk. Greater bank connectedness today leads to increased systemic risk 3-12 months later. More contagious banks earn significantly greater risk-adjusted returns than less contagious ones and the tradable high contagion-minus-low contagion bank portfolio is priced in the cross-section of stock returns. Stocks that co -move more strongly with contagious banks have greater expected returns. These results are robust to factor model specification, test assets, and time period considered. (C) 2017 Elsevier B.V. All rights reserved.