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How Does Systematic Risk Impact Stocks ? A Study On the French Financial Market

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  • Hayette Gatfaoui

    (The University of Paris 1 - Panthéon-Sorbonne)

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    Abstract

    From 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 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 asset returns. These two studies lead to mitigated results.

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    File URL: http://128.118.178.162/eps/ri/papers/0308/0308004.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Risk and Insurance with number 0308004.

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    Length: 16 pages
    Date of creation: 25 Aug 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpri:0308004

    Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP/PostScript; pages: 16 ; figures: included. We never published this piece.
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    Web page: http://128.118.178.162

    Related research

    Keywords: Call pricing Granger causality implied volatility option pricing systematic risk;

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    References

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    1. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    2. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
    3. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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