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Country and industry equity risk premia in the euro area: an intertemporal approach

Author

Listed:
  • Cappiello, Lorenzo
  • Maddaloni, Angela
  • Lo Duca, Marco

Abstract

This paper provides new evidence on the dynamics of equity risk premia in euro area stock markets across country and industry portfolios. We develop and estimate a conditional intertemporal CAPM where returns on aggregate euro area, country and industry portfolios depend on the market risk as well as on the risk that the investment opportunity set changes over time. Prices of risks are time-varying, according to a Kalman filter approach. We find that both market and intertemporal risks are significantly priced. When we include country and industry-specific risk factors they turn out to be not significantly priced for most industries, suggesting that euro area equity markets are well integrated. Overall, the analysis indicates that omitting the intertemporal factor leads to mispricing and misleading conclusions regarding the degree of financial integration across sectors and countries. JEL Classification: G12, F37, C32

Suggested Citation

  • Cappiello, Lorenzo & Maddaloni, Angela & Lo Duca, Marco, 2008. "Country and industry equity risk premia in the euro area: an intertemporal approach," Working Paper Series 913, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008913
    Note: 234084
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp913.pdf
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    Citations

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    Cited by:

    1. Bartram, Söhnke M. & Wang, Yaw-Huei, 2015. "European financial market dependence: An industry analysis," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 146-163.
    2. Costanza Consolandi & Giampaolo Gabbi & Massimo Matthias & Pietro Vozzella, 2013. "The Italian Financial System," FESSUD studies fstudy12, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    3. Cappiello, Lorenzo & Manganelli, Simone & Kadareja, Arjan, 2008. "The impact of the euro on equity markets: a country and sector decomposition," Working Paper Series 906, European Central Bank.
    4. Eling, Martin & Holder, Stefan, 2013. "The value of interest rate guarantees in participating life insurance contracts: Status quo and alternative product design," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 491-503.

    More about this item

    Keywords

    conditional asset pricing; financial integration; intertemporal risk; Kalman filter; multivariate GARCH;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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