Have European Stocks Become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area

46 Pages Posted: 12 Aug 2006

See all articles by Colm Kearney

Colm Kearney

Monash University - Monash Business School

Valerio Potì

University College Dublin

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

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 12 Euro area stock markets over the period 1974-2004. Similarly to Campbell, Lettau, Malkiel and Xu (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the United States, however, market risk is trended upwards in Europe and correlations are not trended downwards. Both the volatility and correlation measures are pro-cyclical, and they rise during times of low market returns. Market and average idiosyncratic volatility jointly predict market wide returns, and the latter impact upon both market and idiosyncratic volatility. This has asset pricing and risk management implications.

Keywords: Idiosyncratic risk, correlation, portfolio management, asset pricing

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

Suggested Citation

Kearney, Colm and Potì, Valerio, Have European Stocks Become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area (April 2006). IIIS Discussion Paper No. 132, Available at SSRN: https://ssrn.com/abstract=923773 or http://dx.doi.org/10.2139/ssrn.923773

Colm Kearney (Contact Author)

Monash University - Monash Business School ( email )

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

Valerio Potì

University College Dublin ( email )

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

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