Cross-industry asset allocation with the spatial interaction on multiple risk transmission channels |
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| Institution: | 1. College of Economics and Management, Shandong University of Science and Technology, Qingdao 266590, China;2. School of Business Administration, Northeastern University, Shenyang 110169, China;1. Research Institute on Sustainable Economic Growth (IRCrES), National Research Council of Italy (CNR), Moncalieri, TO, Italy;2. Faculty of Business Administration and Economics, Bielefeld University, Bielefeld, NRW, Germany;1. Department of Business Administration, Konkuk University, Gwangjin‐gu, Seoul 05029, Republic of Korea;2. Department of Finance, Dong-A University, 225, Gudeok-ro, Seo-gu, Busan 49236, Republic of Korea;1. Fluminense Federal University, Department of Economics and National Council for Scientific and Technological Development (CNPq), Brazil;2. Fluminense Federal University, Department of Economics/FGV EPGE, Brazil;1. LUT Business School, LUT University, P.O. Box 20, FIN-53851 Lappeenranta, Finland;2. Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada |
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| Abstract: | Taking into consideration the real link and information risk transmission channels, we used a spatial econometric approach to construct an economic distance-based spatial weight matrix, which can capture the spatial interaction across industries, and built a return estimation model with spatial interaction using the matrix. On this basis, we derived the covariance matrix and constructed the cross-industry asset allocation model. The empirical results showed that 1) the spatial interaction has a strong explanatory power to return and integrating the spatial interaction on multiple risk transmission channels can improve the effectiveness of the return estimation model; 2) the covariance matrix includes unsystematic risk (idiosyncratic risk) and systematic risk (market risk and cross-industry spillover risk); 3) the asset allocation model with spatial interaction can improve the performance of the portfolio and provide a valuable reference for investors' risk management and investment decision. |
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| Keywords: | Asset allocation Spatial capital asset pricing model Spatial interaction Systematic risk Risk spillover channel |
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