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Faculty of Economics

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Ge, S.

Text-Based Linkages and Local Risk Spillovers in the Equity Market

CWPE20115

Abstract: This paper uses extensive text data to construct firms' links via which local shocks transmit. Using the novel text-based linkages, I estimate a heterogeneous spatial-temporal model which accommodates the contemporaneous and dynamic spillover effects at the same time. I document a considerable degree of local risk spillovers in the market plus sector hierarchical factor model residuals of S&P 500 stocks. The method is found to outperform various previously studied methods in terms of out-of-sample fit. Network analysis of the spatial-temporal model identifies the major systemic risk contributors and receivers, which are of particular interest to microprudential policies. From a macroprudential perspective, a rolling-window analysis reveals that the strength of local risk spillovers increases during periods of crisis, when, on the other hand, the market factor loses its importance.

Keywords: Excess co-movement, weak and strong cross-sectional dependence, local risk spillovers, networks, textual analysis, big data, systemic risk, heterogeneous spatial auto-regressive model (HSAR)

JEL Codes: C33 C58 G10 G12

Author links: Shuyi Ge  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe20115.pdf

Open Access Link: https://doi.org/10.17863/CAM.62830