How Does Systematic Risk Impact Stocks? A Study On the French Financial Market
AbstractFrom the CAC40 French stock index, we induce the implied market factor’s level through the inversion of a closed form pricing formula for European calls on the CAC40. For this purpose, we assume that the CAC40 index is a disturbed observation of the actual market factor, the market factor’s diffusion following a geometric Brownian motion. All the assumptions prevailing in a Black & Scholes (1973) world are assumed to hold. Based on daily data, the results show that the level of the implied market factor and its instantaneous return’s volatility are leptokurtic distributed. Having a proxy for the systematic risk, we also study the impact of the implied market factor on a basket of French assets. First, we compute correlations of assets’ returns with the return of the implied market factor, and realize as well a VAR study and a Granger causality test. Second, we estimate regressions of French assets’ returns on the return of the implied market factor. Then, we characterize the prevailing relationship between the weekly rolling volatility of the return of the implied market factor and weekly rolling volatilities of the French assets returns. These two studies lead to mitigated results.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0404003.
Length: 27 pages
Date of creation: 07 Apr 2004
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Note: Type of Document - pdf; pages: 27
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Call pricing; Granger causality; implied volatility; leptokurtic; systematic risk.;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-11 (All new papers)
- NEP-CFN-2004-04-11 (Corporate Finance)
- NEP-FIN-2004-04-11 (Finance)
- NEP-FMK-2004-04-11 (Financial Markets)
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