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Financial connectedness revisited: the role of Fama-French risk factors

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  • Kisung Yang
  • Myeong Hyeon Kim
  • Young Min Kim

Abstract

We study the contributions of Fama-French type risk factors to spillovers across global stock markets by combining the framework proposed by Diebold and Yilmaz(2009) with insights from asset pricing. We demonstrate that incorporating the risk factors absorbs approximately 40% of information from DY’s total spillover measure to blur the boundaries between ‘To’ and ‘From’ countries and alleviates its upward trend. We find that the DY’s spillover index after controlling for the risk factors yet fluctuates in accordance with historically important economic events over time. Last but not least, the stock market characteristics implied by risk factor exposures are revealed to play the crucial role in determining the Net spillover direction among global equity markets.

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  • Kisung Yang & Myeong Hyeon Kim & Young Min Kim, 2019. "Financial connectedness revisited: the role of Fama-French risk factors," Applied Economics Letters, Taylor & Francis Journals, vol. 26(10), pages 850-856, June.
    • Handle: RePEc:taf:apeclt:v:26:y:2019:i:10:p:850-856
    DOI: 10.1080/13504851.2018.1502864
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    Cited by:

    1. Kim, Young Min & Lee, Seojin, 2023. "Spillover shifts in the FX market: Implication for the behavior of a safe haven currency," The North American Journal of Economics and Finance, Elsevier, vol. 65(C).

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