Frequency connectedness and cross section of stock returns
|Author:||Mgr. Emma Haas|
|Year:||2019 - winter|
|Leaders:|| doc. PhDr. Jozef Baruník Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||The thesis presents a network model, where financial institutions form linkages at
various investment horizons through their interdependence measured by volatility
connectedness. Applying the novel framework of frequency connectedness measures Baruník & Křehlík (2018), based on spectral representation of variance decomposition, we show fundamental properties of connectedness that originate in
heterogeneous frequency responses to shocks. The newly proposed network models characterize financial connections and systemic risk at the short-, mediumand long-term frequency. The empirical focus of this thesis is on the interdependence structure of US financial system, specifically, major U.S. banks in the
period 2000 - 2016. In the light of frequency volatility connectedness measures,
we argue that stocks with high levels of long-term connectedness represent greater
systemic risk, because they are subject to persistent shocks transmitted for longer
periods. When we assess institutions’ risk premiums in asset pricing model, the
model confirms the significance of volatility connectedness factor for asset prices.