Supply chains and risk premia in Chinese stock market: A sorted‐portfolio approach

Abstract

Abstract In the recent literature, increasing attention has been paid to cases when the shocks to a small number of firms would lead to large volatility in many sectors. Theorists find that supply chains play a role, as the shocks to a firm or a sector may propagate through the input–output linkages and form risks in the whole network. In this paper, we investigate the impact of risks from supply‐chain variations on risk premia of the A‐listed firms in the Chinese stock market from 2007 to 2021. Based on network statistics, we measure a firm's local status in the supply chains by the customer‐ and supplier‐concentration, and its global position by the centrality. We then construct corresponding risk factors using diversified portfolios sorted according to these indices. It is found that the supply‐chain positions are related to risk exposure. Firms with de‐concentrated customers/suppliers have larger risk premia than concentrated firms. Moreover, with Size controlled, the firms in the center of cross‐sector trade have higher risk premia than the peripheral ones. When these supply‐chain factors are added to Fama and French's five‐factor model with Market, Size, B/M ratio, Operating profitability, and Investment, the proportion of return variances that could be explained would increase from 51.1% to 54.9% on average.

Keywords

• input–output
• risk premia
• supply chains