Asset Prices, Network Connectedness, and Risk Premium
|Author:||Bc. Vendula Procházková|
|Year:||2020 - summer|
|Leaders:|| doc. PhDr. Jozef Baruník Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||This diploma thesis introduces the measures of network connectedness in the
context of asset pricing. It proposes an asset pricing model in which the factor
of connectedness is included as one of the risk factors together with the three
Fama-French factors. The goal of the analysis is to examine whether the connectedness represents a signifcant risk factor that should be considered while
determining the risk premium of the portfolio in diferent sectors in the market.
Using the realized volatilities and returns of 496 assets of SP 500 index over
the period 2005 – 2018, that are divided into 11 sectors, we frstly determine
the linkages of connectedness between the assets in the same sector. Applying
Fama-MacBeth two-step regression model, we explore the signifcance of the
connectedness factor for the determination of the risk premium. We argue that
the sector overall connectedness represents a signifcant risk in most of the sectors and should be therefore taken into account by the investors in all sectors.
Moreover, the total directional connectedness that captures the spillover of
shocks to one asset from the other assets in the sector, is a signifcant risk factor that should increase the risk premium of the portfolio, especially in sectors
such as the fnancial, health care, consumer and real estate sector.