Job Market Practice

Abstract:

This paper shows that trade-network centrality links global risk exposure in opposite ways across developed and emerging markets. In developed markets (DMs), centrality raises systematic exposure to global risk, whereas in emerging markets (EMs) it reduces it. The results hold for both USD- and local-currency-denominated returns, contradicting integrated-market models that predict uniformly positive slopes. We document that these patterns reflect distinct margins of trade integration: EMs have faced extensive-margin frictions, so higher centrality within segmented blocs shifts exposure toward local shocks and lowers global sensitivity. By contrast, DMs are fully connected at the extensive margin; their integration operates through the intensive margin, where deeper and more diversified trade amplifies exposure to global risk. We build a no-arbitrage model in which dividend growth includes local, global, and centrality-scaled components, and show that heterogeneous cash-flow loadings on global volatility shocks generate opposite centrality–risk slopes across groups. The framework matches the data and identifies trade-network composition as a driver of global risk transmission.