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The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market

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  • Brooks, C.
  • Henry, O.T.

Abstract

The usual measure of the undiversifiable risk of a portfolio is its beta. Recent research has allowed beta estimates to vary over time, often based on symmetric multivariate GARCH models. There is, however, widespread evidence in the literature that the volatilities of asset returns, in particular those from stock markets, show evidence of an asymmetric response to good and bad news. Using UK equity index data, this paper considers the impact of news on time varying measures of beta. The results suggest that beta depends on two sources of news-news about the market and news about the sector. The asymmetric effect in beta is consistent across all sectors considered. Recent research provides conflicting evidence as to whether abnormalities in equity returns are a result of changes in expected returns in an efficient market or an over-reaction to new information. The evidence in this paper suggests that such abnormalities may occur as a result of changes in expected return caused by time-variation and asymmetry in beta.

Suggested Citation

  • Brooks, C. & Henry, O.T., 2000. "The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market," Department of Economics - Working Papers Series 733, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:733
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    References listed on IDEAS

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    Cited by:

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    2. Rahajeng Cahyaning Putri Cipto & Akhsyim Afandi, 2012. "Domestic and foreign factors for stock prices in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 4(2), pages 141-153, April.
    3. O.T. Henry & S. Suardi, 2005. "Testing For Asymmetry In Interest Rate Volatility In The Presence Of A Neglected Level Effect," Department of Economics - Working Papers Series 945, The University of Melbourne.
    4. Feng, Yuanhua, 2006. "A local dynamic conditional correlation model," MPRA Paper 1592, University Library of Munich, Germany.
    5. Cenesizoglu, Tolga & de Oliveira Ferrazoli Ribeiro, Fabio & Reeves, Jonathan J., 2017. "Beta forecasting at long horizons," International Journal of Forecasting, Elsevier, vol. 33(4), pages 936-957.
    6. Luc Savard, 2010. "Scaling up infrastructure spending in the Philippines: A CGE top-down bottom-up microsimulation approach," International Journal of Microsimulation, International Microsimulation Association, vol. 3(1), pages 43-59.
    7. Sandy Suardi & O.T.Henry & N. Olekalns, "undated". "Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics," MRG Discussion Paper Series 0205, School of Economics, University of Queensland, Australia.
    8. Algieri, Bernardina & Lawuobahsumo, Kokulo & Leccadito, Arturo, 2024. "Calendar Effects on Returns, Volatility and Higher Moments: Evidence from Crypto Markets," LIDAM Discussion Papers LFIN 2024001, Université catholique de Louvain, Louvain Finance (LFIN).
    9. Choudhry, Taufiq & Jayasekera, Ranadeva, 2012. "Comparison of efficiency characteristics between the banking sectors of US and UK during the global financial crisis of 2007–2011," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 106-116.
    10. Choudhry, Taufiq & Jayasekera, Ranadeva, 2014. "Market efficiency during the global financial crisis: Empirical evidence from European banks," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 299-318.
    11. Hisham Al Refai & Gazi Mainul Hassan, 2018. "The Impact of Market-wide Volatility on Time-varying Risk: Evidence from Qatar Stock Exchange," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 239-258, August.
    12. Olan T. Henry & Nilss Olekalns & Kalvinder Shields, 2004. "Time Variation And Asymmetry In The World Price Of Covariance Risk: The Implications For International Diversification," Department of Economics - Working Papers Series 907, The University of Melbourne.

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    More about this item

    Keywords

    STOCK MARKET ; RISK;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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