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

The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market * I. Introduction There is widespread evidence that the volatility of equity returns is higher in bull markets than in bear markets. One potential explanation for such asymmetry in variance is the so‐called ‘leverage effect’ of Black (1976) and Christie (1982) . As equity values fall, the weight attached to debt in a firm's capital structure rises, ceteris paribus . This induces equity holders, who bear the residual risk of the firm, to perceive the stream of future income accruing to their portfolios as being relatively more risky. An alternative view is provided by the ‘volatility‐feedback’ hypothesis. Assuming constant dividends, if expected returns increase when stock return volatility increases, then stock prices should fall when volatility rises. Pagan and Schwert (1990) , Nelson (1991) , Campbell and Hentschel (1992) , Engle and Ng (1993) , Glosten, Jagannathan and Runkle (1993) and Henry (1998) , inter alia , provide evidence of asymmetry in equity return volatility using univariate GARCH models. Kroner and Ng (1996) , Braun, Nelson and Sunnier (1995) , Henry and Sharma (1999) , Engle and Cho (1999) and Brooks and Henry (2000) , inter alia , use multivariate GARCH models to capture time variation and asymmetry in http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Oxford Bulletin of Economics & Statistics Wiley

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

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Publisher
Wiley
Copyright
Copyright © 2002 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0305-9049
eISSN
1468-0084
DOI
10.1111/1468-0084.00274
Publisher site
See Article on Publisher Site

Abstract

I. Introduction There is widespread evidence that the volatility of equity returns is higher in bull markets than in bear markets. One potential explanation for such asymmetry in variance is the so‐called ‘leverage effect’ of Black (1976) and Christie (1982) . As equity values fall, the weight attached to debt in a firm's capital structure rises, ceteris paribus . This induces equity holders, who bear the residual risk of the firm, to perceive the stream of future income accruing to their portfolios as being relatively more risky. An alternative view is provided by the ‘volatility‐feedback’ hypothesis. Assuming constant dividends, if expected returns increase when stock return volatility increases, then stock prices should fall when volatility rises. Pagan and Schwert (1990) , Nelson (1991) , Campbell and Hentschel (1992) , Engle and Ng (1993) , Glosten, Jagannathan and Runkle (1993) and Henry (1998) , inter alia , provide evidence of asymmetry in equity return volatility using univariate GARCH models. Kroner and Ng (1996) , Braun, Nelson and Sunnier (1995) , Henry and Sharma (1999) , Engle and Cho (1999) and Brooks and Henry (2000) , inter alia , use multivariate GARCH models to capture time variation and asymmetry in

Journal

Oxford Bulletin of Economics & StatisticsWiley

Published: Dec 1, 2002

References

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