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

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  • Werner, Thomas
  • Stapf, Jelena

Abstract

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.

Suggested Citation

  • Werner, Thomas & Stapf, Jelena, 2003. "How wacky is the DAX? The changing structure of German stock market volatility," Discussion Paper Series 1: Economic Studies 2003,18, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4473
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    File URL: https://www.econstor.eu/bitstream/10419/19650/1/200318dkp.pdf
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    References listed on IDEAS

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    Cited by:

    1. Cizek, P. & Haerdle, W. & Spokoiny, V., 2007. "Adaptive Pointwise Estimation in Time-Inhomogeneous Time-Series Models," Discussion Paper 2007-35, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    market and idiosyncratic volatility; test on break in volatility dynamics; institutional ownership;

    JEL classification:

    • 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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