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How wacky is the DAX? The changing structure of German stock market volatility

  • Werner, Thomas
  • Stapf, Jelena
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    In this paper we investigate the volatility structure of the German stock market index DAX and its constituents. Using a recently developed test, we find a volatility break in 1997. Interestingly, not only is the volatility higher after 1997 but the volatility persistence also increased. That means that there is a greater likelihood of high volatility days being followed by further high volatility days. An immediate consequence is that the tails of the distribution of stock market returns become fatter or that the probability of extreme price movements becomes greater. The break in volatility is not only a phenomenon of the index itself; the returns of the underlying equities also show a volatility break. If the volatility is decomposed into market and firm-specific or idiosyncratic components, the idiosyncratic volatility is shown to have increased much more than the market volatility. This is probably connected to the declining correlations among individual stock returns and has implications for portfolio diversification. When analysing potential reasons for the break in volatility, we find that the increase in the volatility of the German stock market cannot be attributed to international spillovers alone. Domestic factors which may help to explain the break in volatility are the growing number of institutional investors and the increase in the volatility of longer-term interest rates.

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    File URL: http://econstor.eu/bitstream/10419/19650/1/200318dkp.pdf
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    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2003,18.

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    Date of creation: 2003
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    Handle: RePEc:zbw:bubdp1:4473
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    15. Andersen, Torben G & Bollerslev, Tim, 1997. " Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long-Run in High Frequency Returns," Journal of Finance, American Finance Association, vol. 52(3), pages 975-1005, July.
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