Unveiling True Connectedness in US State-Level Stock Markets: The Role of Common Factors

Massimiliano Caporin (), Oguzhan Cepni () and Rangan Gupta
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Massimiliano Caporin: Department of Statistical Sciences, University of Padova, Via Cesare Battisti 241, 35121 Padova, Italy
Oguzhan Cepni: Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark

No 202509, Working Papers from University of Pretoria, Department of Economics

Abstract: The objective of this paper is to analyze the time-varying degree of interconnectedness of 50 state-level stock returns and their volatility of the United States (US) while filtering out common factors and insignificant coefficients using Least Absolute Shrinkage and Selection Operator (Lasso) regularization. Based on monthly data from February 1994 to November 2024, we find that not accounting for common factors is likely to result in relatively higher spillover indexes. Our findings, beyond their academic value, have important implications for investors and policymakers.

Keywords: US state-level stock indexes; returns and volatility; common factors; Lasso; spillover indexes (search for similar items in EconPapers)
JEL-codes: C32 G10 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2025-02
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