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Idiosyncratic Risk, Market Risk and Correlation Dynamics in European Equity Markets

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  • Colm Kearney
  • Valerio Poti

Abstract

We examine total, market and idiosyncratic risk and correlation dynamics using daily data from 1993 to 2001 on the 6 largest euro-zone stock market indices and 42 firms from the Dow Jones Eurostoxx50 index. We also estimate conditional correlations using the asymmetric DCC-MVGARCH model. Comparing our results with those of Campbell, Lettau, Malkiel and Xu (2001), stock correlations are higher and have declined less in the euro-zone than in the United States over the 1990s, implying a lower benefit from diversification strategies. By contrast,correlations amongst market indices have risen, with a structural break related to the process of financial integration in the euro-zone.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp015.

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Date of creation: 01 Jan 2004
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Handle: RePEc:iis:dispap:iiisdp015

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Keywords: WTO; agricultural protection; trade liberalization; poverty alleviation;

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  1. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 373-401, June.
  2. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 1-43, 02.
  3. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  4. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series, European Central Bank 0204, European Central Bank.
  5. Klaas Baks & Andrew Metrick & Jessica Wachter, . "Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-99, Wharton School Rodney L. White Center for Financial Research.
  6. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(4), pages 811-841, August.
  7. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
  8. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, Econometric Society, vol. 38(3), pages 410-21, May.
  9. Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 1999. "EMU and European Stock Market Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2124, C.E.P.R. Discussion Papers.
  10. Andrew Ang & Geert Bekaert, 1999. "International Asset Allocation with Time-Varying Correlations," NBER Working Papers 7056, National Bureau of Economic Research, Inc.
  11. Hentschel, Ludger, 1995. "All in the family Nesting symmetric and asymmetric GARCH models," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(1), pages 71-104, September.
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Cited by:
  1. Gregory Birg & Brian M. Lucey, 2006. "Integration Of Smaller European Equity Markets : A Time-Varying Integration Score Analysis," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp136, IIIS.

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