Under the Carhart four-factor system, this study examines the international transmission mechanism among country-specific risk factors by focusing on the cross-border transmission of factor innovation. We find that international stock markets are interrelated with respect to market, size, value and momentum factors, and developed countries play different roles in each factor system. Moreover, the United States (US) plays a dominant role in the market factor system, with US innovations in terms of size and momentum factors being significantly transmitted to other markets, whereas its influence on the value factor seems marginal. The United Kingdom is found to be the most influential market in the size factor system. Finally, Japanese value factor innovations better explain Hong Kong variance than US value factor innovations. Our results indicate that international exposure to risk factors can be exploited to implement effective hedging strategies and manage globally diversified portfolio risks.
Bibliographical noteFunding Information:
This paper is a substantially extended version of a preliminary conference report presented at the European Finance Association Meeting in 2007 and the Second International Conference on Asia-Pacific Financial Markets in 2007, under the title ‘International Factor Linkages.’ The earlier version of this study was part of the second-year paper of Hyung-Suk Choi’s PhD programme at Georgia Tech in 2006. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2017S1A5A2A01025583).
© 2018 Investment Analysts Society of South Africa.
- Forecast error variance
- Impulse response function
- International transmission
- Multi-factor model
- Vector autoregression