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Have European Stocks become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area

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Author Info
Colm Kearney
Valerio Potì

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Abstract

"We examine the dynamics of idiosyncratic risk, market risk and return correlations in European equity markets using weekly observations from 3515 stocks listed in the 12 euro area stock markets over the period 1974-2004. Similarly to""Campbell et al. (2001)"", we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the US, however, market risk is trended upwards in Europe and correlations are not trended downwards. Both the volatility and correlation measures are pro-cyclical, and they rise during times of low market returns. Market and average idiosyncratic volatility jointly predict market wide returns, and the latter impact upon both market and idiosyncratic volatility. This has asset pricing and risk management implications." Copyright (c) 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00395.x
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Article provided by Blackwell Publishing Ltd in its journal European Financial Management.

Volume (Year): 14 (2008)
Issue (Month): 3 ()
Pages: 419-444
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Handle: RePEc:bla:eufman:v:14:y:2008:i:3:p:419-444

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  3. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September. [Downloadable!] (restricted)
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  6. Steven X. Wei & Chu Zhang, 2006. "Why Did Individual Stocks Become More Volatile?," Journal of Business, University of Chicago Press, vol. 79(1), pages 259-292, January. [Downloadable!]
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  20. Fratzscher, Marcel, 2002. "Financial Market Integration in Europe: On the Effects of EMU on Stock Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(3), pages 165-93, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kenza Benhima, 2008. "A Reappraisal of the Allocation Puzzle through the Portfolio Approach," EconomiX Working Papers 2008-27, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  2. Timotheos Angelidis, 2008. "Idiosyncratic Risk in Emerging Markets," Working Papers 0018, University of Peloponnese, Department of Economics. [Downloadable!]
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