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Modeling Common Volatility and Dynamic Risk Premia in European Equity MarketsGregory KoutmosFairfield University - Charles F. Dolan School of Business Johan KnifHanken School of Economics / Department of Finance and Statistics George C. PhilippatosUniversity of Tennessee, Knoxville - College of Business Administration January 2002 EFMA 2002 London Meetings Abstract: 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: C1 working papers seriesDate posted: June 20, 2002Suggested CitationContact Information
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