Spatial Dependence in Asset Pricing

31 Pages Posted: 30 Sep 2016 Last revised: 13 May 2020

See all articles by Stanimira Milcheva

Stanimira Milcheva

University College London

Bing Zhu

University of Reading - Henley Business School

Date Written: September 27, 2016


We follow the seminal work of Paelinck (1978) who introduces spatial interdependence of, i.e. income, expenditure, investment, to classic Keynesian economic models, and estimate a spatial factor model. Asset prices may display characteristics of spatial dependence meaning spatial proximity can explain return comovements with neighboring firms. The spatial patterns are not associated with exposure to local factors but account for interdependence between returns based on individual unobserved characteristics transmitted spatially. Accounting for spatial return dependence would not change the classic factor model by introducing a new factor. Instead, it enables us to disentangle spatial spillover risk from market risk and idiosyncratic risk, which changes the risk allocation across those components. Our results show that returns display spatial patterns and the spatial volatility mostly matters arises during the Global Financial Crisis (GFC). The spatial spillover risk can contribute up to 28% to total asset risk. Our results imply that investors should consider spatially distributed local risks which otherwise will be hard to capture as firms do not have a single location and an exposure to a single region.

Keywords: Asset pricing, spatial dependence, spatial spillover risk.

JEL Classification: G12, C30

Suggested Citation

Milcheva, Stanimira and Zhu, Bing, Spatial Dependence in Asset Pricing (September 27, 2016). Available at SSRN: or

Stanimira Milcheva (Contact Author)

University College London ( email )

1-19 Torrington Place
Bartlett School of Sustainable Construction
London, London WC1E 7HB
United Kingdom


Bing Zhu

University of Reading - Henley Business School ( email )

Henley, RG9 3AU
United Kingdom

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