Have European Stocks Become More Volatile

32 Pages Posted: 12 Mar 2005

See all articles by Valerio Potì

Valerio Potì

University College Dublin

Colm Kearney

Monash University - Monash Business School

Date Written: February 25, 2005

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 12 countries over 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 are trended mildly downwards. Market volatility leads the other volatility measures. Both the volatility and correlation measures are pro-cyclical, rising during times of low market returns, implying a skewed market portfolio return distribution. Market and average idiosyncratic volatility together predict market wide returns.

Keywords: Correlation dynamics, idiosyncratic risk, asset pricing, portfolio management

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

Suggested Citation

Potì, Valerio and Kearney, Colm, Have European Stocks Become More Volatile (February 25, 2005). Available at SSRN: https://ssrn.com/abstract=676550 or http://dx.doi.org/10.2139/ssrn.676550

Valerio Potì (Contact Author)

University College Dublin ( email )

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

Colm Kearney

Monash University - Monash Business School ( email )

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

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