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

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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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Colm Kearney
Valerio Poti

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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, Lettau, Malkiel and Xu (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the United States , 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.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp132.

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Date of creation: 23 May 2006
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Article
- Colm Kearney & Valerio Potì, 2008. "Have European Stocks become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area," European Financial Management, Blackwell Publishing Ltd, vol. 14(3), pages 419-444. [Downloadable!] (restricted)

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-05-27 (All new papers)
NEP-CFN-2006-05-27 (Corporate Finance)
NEP-EEC-2006-05-27 (European Economics)
NEP-FIN-2006-05-27 (Finance)
NEP-FMK-2006-05-27 (Financial Markets)
NEP-RMG-2006-05-27 (Risk Management)

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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.)

Timotheos Angelidis, 2008. "Idiosyncratic Risk in Emerging Markets," Working Papers 0018, University of Peloponnese, Department of Economics. [Downloadable!]
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!]

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