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Dynamic correlation structure and security risk

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  • Vozlyublennaia, Nadia
  • Meshcheryakov, Artem

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.

Suggested Citation

  • Vozlyublennaia, Nadia & Meshcheryakov, Artem, 2014. "Dynamic correlation structure and security risk," Journal of Economics and Business, Elsevier, vol. 73(C), pages 48-64.
    • Handle: RePEc:eee:jebusi:v:73:y:2014:i:c:p:48-64
    DOI: 10.1016/j.jeconbus.2014.01.003
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    More about this item

    Keywords

    Idiosyncratic risk; Systematic risk; Return correlation structure; GARCH; CAPM;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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