Supply Chain and Correlations

Abstract

This article is an in-depth large-scale analysis of the supply chain network and its bearing on the correlation structure of stock returns. The authors show that the stock returns of companies that are connected through the supply chain network exhibit a correlation structure that differs significantly from that of random pairs of stocks. This effect is observed for companies that are connected directly as well as through a common third party. A clustering approach is used to yield some interesting easier-to-exploit results with a view toward risk modeling. The authors also perform an analysis of rare negative events, highlighting some lead-lag relationships.