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 correlation.