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