Modeling Common Volatility and Dynamic Risk Premia in European Equity Markets
Fairfield University - Charles F. Dolan School of Business
Hanken School of Economics / Department of Finance and Statistics
George C. Philippatos
University of Tennessee, Knoxville - College of Business Administration
EFMA 2002 London Meetings
This paper tests the hypothesis that the market portfolio in European equity returns is a dynamic factor in the sense that individual stock return volatilities and risk premia are driven by the dynamics of a common dynamic factor namely, the market portfolio. Support for the hypothesis would suggest that the dynamic Arbitrage Pricing Theory with observed dynamic factors (APT) provides a satisfactory description of the dynamics of European stock return. In addition, this paper examines the role of portfolio size, in the behavior of first and second moment dynamics.
Number of Pages in PDF File: 19
Keywords: Factor-GARCH, European markets, dynamic risk premia, common volatility
JEL Classification: C1working papers series
Date posted: June 20, 2002
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