How Does Systematic Risk Impact Stocks? A Study of the French Financial Market

Systematic risk is known to affect the market prices of traded financial assets (Stulz, 1999a, 1999b, 1999c). Indeed, the capital asset pricing model (CAPM) theory argues that each financial asset bears an undiversifiable risk known as systematic or market risk, as introduced by Sharpe (1963, 1964, 1970) and Treynor (1961) among others. 1 Such a risk can be estimated through a well-diversified portfolio so far as this portfolio presents as low as possible an idiosyncratic risk (French and Poterba, 1991). Recent literature focuses mainly on a sound assessment of the influence of systematic risk on financial assets, along with the beta coefficient in a CAPM framework. Koutmos and Knif (2002) estimate the influence of systematic risk while employing time-varying distributions (for example, conditional distributions depending on past innovations). Using market stock indices of the financial markets under consideration, they find that financial assets’ betas are stationary mean-reverting processes with an average degree of persistence equal to four days. Gençay, Selçuk and Whitcher (2003) use wavelet techniques to assess the influence of systematic risk on any asset, or equivalently to compute its beta in a CAPM model. These authors use the S&P 500 index as a systematic risk benchmark. Therefore, common practice resorts to available stock indices as proxies for a well-diversified market portfolio, and pays little attention to the sound assessment of systematic risk itself. 2 These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.