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Idiosyncratic Risk, Market Risk and Correlation
Dynamics in European Equity Markets

Colm Kearney and Valerio Poti IIIS Discussion Paper No. 15

Abstract We examine total, market and idiosyncratic risk and correlation dynamics using daily data from 1993 to 2001 on the 6 largest euro-zone stock market indices and 42 firms from the Dow Jones Eurostoxx50 index. We also estimate conditional correlations using the asymmetric DCC-MVGARCH model. Comparing our results with those of Campbell, Lettau, Malkiel and Xu (2001), stock correlations are higher and have declined less in the euro-zone than in the United States over the 1990s, implying a lower benefit from diversification strategies. By contrast,
correlations amongst market indices have risen, with a structural break related to the process of financial integration in the euro-zone.

Keywords : Correlation dynamics, GARCH, idiosyncratic risk.

Last updated 28 August 2014 by IIIS (Email).