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Decomposing U.S. Stock Market Comovement into spillovers and common factors

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  • Weber, Enzo

Abstract

This paper disentangles direct spillovers and common factors, the sources of correlations in simultaneous heteroscedastic systems. While these different components are not identifiable by standard means without restrictions, it is shown that they can be distinguished by specifying the variances of the latent idiosyncratic and common shocks as ARCH-type processes. By applying an adapted Kalman filter estimation method to Dow and Nasdaq stock returns, predominant spillovers from the Dow are found, as well as substantial rising factor exposure. While the latter is shown to prevail in the recent global financial crisis, volatility in the dot-com bubble period was driven by Nasdaq shocks.

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  • Weber, Enzo, 2013. "Decomposing U.S. Stock Market Comovement into spillovers and common factors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 106-118.
    • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:106-118
    DOI: 10.1016/j.najef.2013.08.001
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    More about this item

    Keywords

    Simultaneous system; Latent factor; Identification; Spillover; EGARCH;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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