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The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market

Author

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  • Brooks, C.
  • Henry, O.T.

Abstract

The usual measure of the undiversifiable risk of a portfolio is its beta. Recent research has allowed beta estimates to vary over time, often based on symmetric multivariate GARCH models. There is, however, widespread evidence in the literature that the volatilities of asset returns, in particular those from stock markets, show evidence of an asymmetric response to good and bad news. Using UK equity index data, this paper considers the impact of news on time varying measures of beta. The results suggest that beta depends on two sources of news-news about the market and news about the sector. The asymmetric effect in beta is consistent across all sectors considered. Recent research provides conflicting evidence as to whether abnormalities in equity returns are a result of changes in expected returns in an efficient market or an over-reaction to new information. The evidence in this paper suggests that such abnormalities may occur as a result of changes in expected return caused by time-variation and asymmetry in beta.

Suggested Citation

  • Brooks, C. & Henry, O.T., 2000. "The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market," Department of Economics - Working Papers Series 733, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:733
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-00-01/733.pdf
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    References listed on IDEAS

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    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    3. Olan Henry, 1998. "Modelling the asymmetry of stock market volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 145-153.
    4. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
    5. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    6. Chopra, Navin & Lakonishok, Josef & Ritter, Jay R., 1992. "Measuring abnormal performance : Do stocks overreact?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 235-268, April.
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    Citations

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    Cited by:

    1. Taufiq Choudhry & Ranadeva Jayasekera, 2015. "Level of efficiency in the UK equity market: empirical study of the effects of the global financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 213-242, February.
    2. O.T. Henry & S. Suardi, 2005. "Testing For Asymmetry In Interest Rate Volatility In The Presence Of A Neglected Level Effect," Department of Economics - Working Papers Series 945, The University of Melbourne.
    3. Feng, Yuanhua, 2006. "A local dynamic conditional correlation model," MPRA Paper 1592, University Library of Munich, Germany.
    4. Sandy Suardi & O.T.Henry & N. Olekalns, "undated". "Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics," MRG Discussion Paper Series 0206, School of Economics, University of Queensland, Australia.
    5. Choudhry, Taufiq & Jayasekera, Ranadeva, 2012. "Comparison of efficiency characteristics between the banking sectors of US and UK during the global financial crisis of 2007–2011," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 106-116.
    6. repec:eee:intfor:v:33:y:2017:i:4:p:936-957 is not listed on IDEAS
    7. Choudhry, Taufiq & Jayasekera, Ranadeva, 2014. "Market efficiency during the global financial crisis: Empirical evidence from European banks," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 299-318.

    More about this item

    Keywords

    STOCK MARKET ; RISK;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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