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

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.