The authors wish to thank an anonymous referee and Professor John Doukas (the Editor) for insightful comments and useful suggestions. Previous versions of this paper were presented at seminars at Bocconi University Milan, Queen's University Belfast and Dublin City University, at the European meeting of the Financial Management Association in Dublin, June 2003, at the Annual Meeting of the European Finance Association in Glasgow, August 2003, at the Annual Meeting of the Global Finance Association in Dublin, June 2005, at the Annual Meeting of the European Financial Management Association in Milan, June 2005, and at the INFINITI conference in Trinity College Dublin. The authors wish to thank the participants at these meetings for useful comments and discussions. All remaining errors are ours.
Have European Stocks become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area
Version of Record online: 24 SEP 2007
© 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
European Financial Management
Volume 14, Issue 3, pages 419–444, June 2008
How to Cite
Kearney, C. and Potì, V. (2008), Have European Stocks become More Volatile? An Empirical Investigation of Idiosyncratic and Market Risk in the Euro Area. European Financial Management, 14: 419–444. doi: 10.1111/j.1468-036X.2007.00395.x
The authors gratefully acknowledge financial support from the Irish Research Council for the Humanities and Social Sciences. Correspondence: Valerie Poti.
- Issue online: 24 SEP 2007
- Version of Record online: 24 SEP 2007
- idiosyncratic risk;
- portfolio management;
- asset pricing
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 toCampbell et al. (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the US, 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.