Dynamic correlation structure and security risk

Nadia Vozlyublennaia and Artem Meshcheryakov

Journal of Economics and Business, 2014, vol. 73, issue C, 48-64

Abstract: We investigate the relationship between changing correlation structure of returns, security risk, and mean return. According to our results, securities that were highly correlated with the market-wide risk factors in the past are likely to have high systematic and idiosyncratic risk at present. Correlations with the risk factors, however, are not directly related to the mean return of securities, nor can they consistently explain the puzzling relationship between idiosyncratic risk and return. We demonstrate further that the effect of past correlations on security risk is more likely among less transparent securities.

Keywords: Idiosyncratic risk; Systematic risk; Return correlation structure; GARCH; CAPM (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:73:y:2014:i:c:p:48-64

DOI: 10.1016/j.jeconbus.2014.01.003

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