Concentration of the UK Stock Market

22 Pages Posted: 22 Apr 2008

Date Written: 2007-11

Abstract

During 1999 and 2000 a large number of articles appeared in the financial press which argued that the concentration of the FTSE 100 had increased. Many of these reports suggested that stock market volatility in the UK had risen, because the concentration of its stock markets had increased. This study undertakes a comprehensive measurement of stock market concentration using the FTSE 100 index. We find that during 1999, 2000 and 2001 stock market concentration was noticeably higher than at any other time since the index was introduced. When we measure the volatility of the FTSE 100 index we do not find an association between concentration and its volatility. When we examine the variances and covariance's of the FTSE 100 constituents we find that security volatility appears to be positively related to concentration changes but concentration and the size of security covariances appear to be negatively related. We simulate the variance of four versions of the FTSE 100 index; in each version of the index the weighting structure reflects either an equally weighted index, or one with levels of low, intermediate or high concentration. We find that moving from low to high concentration has very little impact on the volatility of the index. To complete the study we estimate the minimum variance portfolio for the FTSE 100, we then compare concentration levels of this index to those formed on the basis of market weighting. We find that realised FTSE index weightings are higher than for the minimum variance index.

Suggested Citation

Chelley-Steeley, Patricia, Concentration of the UK Stock Market (2007-11). Journal of Business Finance & Accounting, Vol. 35, Issue 3-4, pp. 541-562, April/May 2008, Available at SSRN: https://ssrn.com/abstract=1122928 or http://dx.doi.org/10.1111/j.1468-5957.2007.02073.x

Patricia Chelley-Steeley (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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