Financial sector volatility connectedness and equity returns

Arbeitspapier

We apply the Diebold and Yilmaz (2014) methodology to daily stock prices of the largest 40 U.S. financial institutions to construct a volatility connectedness index. We then estimate the contemporaneous return sensitivity of every non-financial U.S. company to this index. We find that there is a large statistically significant difference between the returns of firms with positive and negative exposures to financial connectedness. The four-factor alpha of a strategy that goes long in the bottom decile and short in the top decile of stocks sorted on their connectedness betas is roughly 15% per annum. Bivariate portfolio tests reveal that abnormal returns are robust to market beta, size, book-to-market ratio, momentum, debt, illiquidity, and idiosyncratic volatility. Abnormal returns are asymmetric; they are primarily driven by firms whose returns covary negatively with the index. These firms tend to be young and small, with poor past performance and low credit quality.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 1803

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
• Subject: Cross-section of returns ; Anomalies ; Financial connectedness ; Vector autoregressions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Demirer, Mert ; Gökçen, Umut ; Yılmaz, Kamil
• Event: Veröffentlichung
• (who): Koç University-TÜSİAD Economic Research Forum (ERF)
• (where): Istanbul
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/202977
• Last update: 10.03.2025, 11:45 AM CET