Financial connectedness revisited: the role of Fama-French risk factors. Issue 10 (7th June 2019)

• Record Type: Journal Article
• Authors: Yang, Kisung; Kim, Myeong Hyeon; Kim, Young Min
• Is Part Of: Applied economics letters. Volume 26:Issue 10(2019)
• Page Start: 850
• Page End: 856
• Publication Date: 2019-06-07
• Subjects: Financial connectedness -- global equity markets -- risk factors -- generalized forecasting error decomposition; C32 -- G12 -- G15; Economics -- Periodicals; Economics, Mathematical -- Periodicals; 330
• DOI: 10.1080/13504851.2018.1502864
• Languages: English
• ISSNs: 1350-4851

Abstract

ABSTRACT: We study the contributions of Fama-French type risk factors to spillovers across global stock markets by combining the framework proposed by Diebold and Yilmaz(2009) with insights from asset pricing. We demonstrate that incorporating the risk factors absorbs approximately 40% of information from DY's total spillover measure to blur the boundaries between 'To' and 'From' countries and alleviates its upward trend. We find that the DY's spillover index after controlling for the risk factors yet fluctuates in accordance with historically important economic events over time. Last but not least, the stock market characteristics implied by risk factor exposures are revealed to play the crucial role in determining the Net spillover direction among global equity markets.