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Revisiting asset co-movement: Does network topology really matter?

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  • Shi, Huai-Long
  • Chen, Huayi

Abstract

Asset co-movement has garnered increasing attention from researchers in both traditional finance and emerging interdisciplinary disciplines. However, there is limited knowledge regarding the consistency of market-wide co-movement proxies constructed based on these two perspectives. Employing Fama–French industry portfolios as samples, we construct market-wide co-movement proxies in terms of R2-based and network-based approaches. We further examine if and how market-wide co-movement is priced using supervised principal analysis (SPCA) proposed by Giglio et al. (2021). Our findings include: First, most topological properties are highly correlated with the R2-based proxies. Second, the risk-premium estimates by the SPCA range from 90 bps to 130 bps per month, depending on the size of the latent factors considered. Furthermore, most co-movement proxies are linked to the characteristics regarding asset fundamentals. However, the associated R2 values remain around only 15%, highlighting the challenges in hedging the risks associated with market-wide co-movement in equity markets.

Suggested Citation

  • Shi, Huai-Long & Chen, Huayi, 2023. "Revisiting asset co-movement: Does network topology really matter?," Research in International Business and Finance, Elsevier, vol. 66(C).
  • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001903
    DOI: 10.1016/j.ribaf.2023.102064
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    More about this item

    Keywords

    Co-movement; R-squared; Network theory; PCA; Asset pricing;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • 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

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