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). 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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