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Asset Pricing with Spatial Interaction

Oberseminar Finanz- und Versicherungsmathematik


Asset Pricing with Spatial Interaction

Abstract

We propose a spatial capital asset pricing model (S-CAPM) and a spatial arbitrage pricing theory (S-APT) that extend the classical asset pricing models by incorporating spatial interaction. We then apply the S-APT to study the comovements of Eurozone stock indices (by extending the Fama French factor model to regional stock indices) and the futures contracts on S&P Case-Shiller Home Price Indices. In both cases spatial interaction is significant and plays an important role in explaining cross-sectional correlations.

This is a joint work with Xianhua Peng and Haowen Zhong.