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Arbitrage Pricing with Heterogeneous Spatial Effects and Heteroscedastic Disturbances

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  • Jianhua Hu
  • Hao Ding
  • Xiaoqian Liu

Abstract

We develop a heterogeneous spatial arbit and regression coefficients, and heteroscedastic variances, and further establish identification of parameters and asymptotic normality of the conditional QML estimators under some mild conditions. We apply the proposed model to study a real data set of 11 eurozone stock index returns and extend the Fama–French five-factor model to regional stock indices, in which heterogeneous spatial effects and heteroscedastic disturbances are highly significant and they both play very important roles in explaining distinct endogenous effects and distinct risks of the 11 eurozone stock markets. Our empirical results reveal unique characteristics of each of 11 eurozone stock markets and their inner connections.

Suggested Citation

  • Jianhua Hu & Hao Ding & Xiaoqian Liu, 2023. "Arbitrage Pricing with Heterogeneous Spatial Effects and Heteroscedastic Disturbances," Journal of Financial Econometrics, Oxford University Press, vol. 21(4), pages 1169-1195.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:4:p:1169-1195.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbab032
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    Keywords

    conditional quasi-maximum-likelihood estimator; Fama–French models; heterogeneous spatial arbitrage pricing model; heterogeneous spatial interaction;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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