Factor volatility spillover and its implications on factor premia

Huai-Long Shi and Wei-Xing Zhou

Journal of International Financial Markets, Institutions and Money, 2022, vol. 80, issue C

Abstract: We employ the generalized forecast error variance decomposition based on the vector autoregression model to investigate factors’ volatility spillovers. Furthermore, we investigate the relationship between factor volatility spillovers and their premia via portfolio analysis. We find: (1) North America is the net transmitter of volatility shock, while Asia-Pacific is the net receiver; the profitability factor, RMW, is the net transmitter. (2) Volatility spillovers would be intensified after major risk events. (3) A positive relationship exists between the volatility spillovers and factor premia, better explained by factor momentum. Our findings are meaningful for risk management and practical investing.

Keywords: Volatility spillovers; Asset pricing; Risk factors; Factor premia; International stock markets (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:80:y:2022:i:c:s1042443122001068

DOI: 10.1016/j.intfin.2022.101631

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