Volatility Patterns and Idiosyncratic Risk on the Swedish Stock Market

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Using the methodology introduced by Campbell et al. (2001), we decompose and evaluate the historical volatility patterns of the Swedish stock market in the time period 1985 - 2012. The volatility at all component levels, including idiosyncratic risk, appear to be fairly stable throughout the sample, with the exception of temporary dramatic increases during periods of economic distress. As opposed to Campbell et al. (2001), we do not find an upward trend in idiosyncratic volatility in the full sample period. Increased competition or an increased number of listed firms does not appear to cause an increase in idiosyncratic risk in Sweden. A similar approach is used to study the volatility of individual industries. The results are mixed. Six out of 19 industries exhibit a significant trend in the full sample period, of which four have negative trend coefficients.

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