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Text-Based Linkages and Local Risk Spillovers in the Equity Market

Shuyi Ge

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper uses extensive text data to construct firms' links via which local shocks transmit. Using the novel text-based linkages, I estimate a heterogeneous spatial-temporal model which accommodates the contemporaneous and dynamic spillover effects at the same time. I document a considerable degree of local risk spillovers in the market plus sector hierarchical factor model residuals of S&P 500 stocks. The method is found to outperform various previously studied methods in terms of out-of-sample fit. Network analysis of the spatial-temporal model identifies the major systemic risk contributors and receivers, which are of particular interest to microprudential policies. From a macroprudential perspective, a rolling-window analysis reveals that the strength of local risk spillovers increases during periods of crisis, when, on the other hand, the market factor loses its importance.

Keywords: Excess co-movement; weak and strong cross-sectional dependence; local risk spillovers; networks; textual analysis; big data; systemic risk; heterogeneous spatial auto-regressive model (HSAR) (search for similar items in EconPapers)
JEL-codes: C33 C58 G10 G12 (search for similar items in EconPapers)
Date: 2020-11-26
New Economics Papers: this item is included in nep-big, nep-cmp, nep-net, nep-rmg and nep-ure
Note: sg751
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