Factor Volatility Spillover and Its Implications on Factor Premia

We employ the generalized forecast error variance decomposition based on the vector autoregression model to investigate factors' volatility spillovers. Furthermore, we investigate the relationship between factor volatility spillovers and their premia via the portfolio analysis. We find: (1) North America is the net transmitter of volatility shock, while the Asia-Pacific is the net receiver; the profitability factor, RMW, is the net transmitter. (2) Volatility spillovers would be intensified after major risk events. (3) A positive relationship exists between the volatility spillovers and factor premia, better explained by factor momentum. Our findings are meaningful for risk management and practical investing