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Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes

Author

Listed:
  • Nuhiu Artor

    (Faculty of Law, University of Prishtina, Prishtina, Kosovo.)

  • Aliu Florin

    (Faculty of Management, Business, and Economics, University for Business and Technology, Prishtina, Kosovo.)

  • Peci Bedri

    (Faculty of Law, University of Prishtina, Prishtina, Kosovo.)

Abstract

Diversification of financial securities is considered a substantial element of portfolio risk. In this context, the construction of an optimal portfolio is an ongoing concern for portfolio managers. This study measures the risk–reward tradeoffs linked to the stock indexes of Germany, Spain, Italy, France, and England. First, the stock indexes are analyzed as individual portfolios and later compared to the hypothetical common equity index. The results show diversification benefits gained from a hypothetical common European stock market. Individual stock prices and trade volumes are collected weekly from January 1, 2008 to December 31, 2018. The results indicate that, on average, the most well-diversified equity indexes are IBEX35, FTSE MIB, and FTSE100. In contrast, DAX, MDAX, and CAC40 on average tend to be less diversified. The diversification risk for DAX, MDAX, and CAC40 decreases from joining a common hypothetical stock market, while for FTSE100, FTSE MIB, and IBEX it increases.

Suggested Citation

  • Nuhiu Artor & Aliu Florin & Peci Bedri, 2022. "Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 58(1), pages 3-16, March.
    • Handle: RePEc:vrs:ijomae:v:58:y:2022:i:1:p:3-16:n:6
    DOI: 10.2478/ijme-2022-0001
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    More about this item

    Keywords

    diversification benefits; financial crisis; risk perspective; single equity market; stock index;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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