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Factor volatility spillover and its implications on factor premia

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  • Shi, Huai-Long
  • Zhou, Wei-Xing

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.

Suggested Citation

  • Shi, Huai-Long & Zhou, Wei-Xing, 2022. "Factor volatility spillover and its implications on factor premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:intfin:v:80:y:2022:i:c:s1042443122001068
    DOI: 10.1016/j.intfin.2022.101631
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    Keywords

    Volatility spillovers; Asset pricing; Risk factors; Factor premia; International stock markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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