Posts

I develop a dynamic production-based network model to examine the economic and asset pricing implications of inter-sector idiosyncratic volatility spillovers. I introduce two time-series factors to capture time-varying structural changes in idiosyncratic volatility spillovers and show that they shape the persistent dynamics of aggregate volatility in equilibrium and are priced as volatility risk factors. Empirically, I construct these factors using stock data and demonstrate that they predict future aggregate volatility in the direction implied by the model. Furthermore, long-short portfolios formed based on these factors generate return spreads that are unexplained by existing factor models.