Modeling Common Volatility and Dynamic Risk Premia in European Equity Markets

19 Pages Posted: 20 Jun 2002

See all articles by Gregory Koutmos

Gregory Koutmos

Fairfield University - Charles F. Dolan School of Business

Johan Knif

Hanken School of Economics

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration

Date Written: January 2002

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.

Keywords: Factor-GARCH, European markets, dynamic risk premia, common volatility

JEL Classification: C1

Suggested Citation

Koutmos, Gregory and Knif, Johan Anders and Philippatos, George C., Modeling Common Volatility and Dynamic Risk Premia in European Equity Markets (January 2002). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314508 or http://dx.doi.org/10.2139/ssrn.314508

Gregory Koutmos (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

Dolan School of Business
N. Benson Road
Fairfield, CT 06824
United States
203-254-4000 Ext. 2832 (Phone)

Johan Anders Knif

Hanken School of Economics ( email )

P.O. Box 287
FIN-65101 Vasa
Finland
+358 453556008 (Phone)

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration ( email )

432 Stokely Management Center
Knoxville, TN 37996-0570
United States
(865) 974-1719 (Phone)

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