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Have European Stocks Become More Volatile? An Empirical Investigation of Volatilities and Correlations in EMU Equity Markets at the Firm, Industry and Market Level

35 Pages Posted: 10 Nov 2004  

Colm Kearney

Monash University - Monash Business School

Valerio Potì

University College Dublin

Date Written: August 23, 2004

Abstract

We examine the dynamics of idiosyncratic risk, market risk and return correlations in European equity markets using weekly observations from 3515 stocks listed in the Euro-area stock markets in the period 1974-2004. Similarly to Campbell, Lettau, Malkiel and Xu (2001), we find an increase in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to their findings, however, market risk is trended upwards and correlations among the stocks are only mildly trended downwards. Market volatility tends to lead the other volatility measures in EMU markets whereas idiosyncratic volatility leads in the US ones. Both the volatility and the correlation measures increase at times of low market returns implying a skewed market portfolio return distribution. We suggest a number of implications of these findings for portfolio management, trading and asset pricing.

Keywords: Correlation dynamics, idiosyncratic risk, asset pricing

JEL Classification: C32, G12, G11, G12, G15

Suggested Citation

Kearney , Colm and Potì, Valerio, Have European Stocks Become More Volatile? An Empirical Investigation of Volatilities and Correlations in EMU Equity Markets at the Firm, Industry and Market Level (August 23, 2004). Available at SSRN: https://ssrn.com/abstract=615103 or http://dx.doi.org/10.2139/ssrn.615103

Colm Kearney

Monash University - Monash Business School ( email )

Sir John Monash Drive
Caulfield
Melbourne, Victoria 3168
Australia
+353399031021 (Phone)

Valerio Potì (Contact Author)

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

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