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Abnormal Returns or Mismeasured Risk? Network Effects and Risk Spillover in Stock Returns

1
Spatial Economics & Econometrics Centre, Heriot-Watt University, Edinburgh EH14 4AS, UK
2
Finlabs India Pvt. Ltd., Mumbai 400051, India
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2019, 12(2), 50; https://doi.org/10.3390/jrfm12020050
Received: 4 February 2019 / Revised: 5 March 2019 / Accepted: 18 March 2019 / Published: 29 March 2019
(This article belongs to the Special Issue Applied Econometrics)
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PDF [278 KB, uploaded 29 March 2019]

Abstract

Recent event study literature has highlighted abnormal stock returns, particularly in short event windows. A common explanation is the cross-correlation of stock returns that are often enhanced during periods of sharp market movements. This suggests the misspecification of the underlying factor model, typically the Fama-French model. By drawing upon recent panel data literature with cross-section dependence, we argue that the Fame-French factor model can be enriched by allowing explicitly for network effects between stock returns. We show that recent empirical work is consistent with the above interpretation, and we advance some hypotheses along which new structural models for stock returns may be developed. Applied to data on stock returns for the 30 Dow Jones Industrial Average (DJIA) stocks, our framework provides exciting new insights. View Full-Text
Keywords: Fama-French factor model; market microstructure; trading behavior; panel data factor model; social network model; risk spillover; abnormal returns Fama-French factor model; market microstructure; trading behavior; panel data factor model; social network model; risk spillover; abnormal returns
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Bhattacharjee, A.; Roy, S. Abnormal Returns or Mismeasured Risk? Network Effects and Risk Spillover in Stock Returns. J. Risk Financial Manag. 2019, 12, 50.

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