HELENA CHULIÁ AND HIPÒLIT TORRÓ 331There are two main advantages in simultaneously modeling the condi-
tional mean and variance. First, it is possible to quantify volatility cross
effects between both types of firms. Second, it is possible to quantify the
influence of the second moments cross effects in the expected returns.
17.3 Data and preliminary analysis
The data used for the French market come from Euronext, provided by the
French Stock Exchange. It consists of daily closing values of the CAC40
index and the MIDCAC index. The data period runs from 2 January 1991
to 25 August 2004. The CAC40 index is calculated from a sample of 40
French stocks listed on the Monthly Settlement market. Component stocks
are selected on the basis of their market capitalization and liquidity. The
100 MIDCAC components stocks are selected among the French companies
listed on the “Premier Marche” or “Second Marche”, after eliminating: (1)
the financial and property companies, (2) the 20% highest ant 20% lowest
capitalized companies and (3) issues with a trading-day ratio below 70% (for
example, traded on less than 175 of the total 250 trading days in the year).
In the case of the German market, the data has been provided by the
German Stock Exchange. It consists of daily closing values of the DAX index
and the SDAX index. The data period runs from 2 January 1991 to 25 August
- The DAX index is composed by the 30 largest and more actively traded
German companies that are listed at the Frankfurt Stock Exchange. On the
other hand, the SDAX comprises 50 continuously traded shares of small-
sized companies.
The data used for the British market has been provided by the FTSE com-
pany. It consists of daily closing values of the FTSE 100 index and SMALL
CAP index. The data period runs from 3 March 1993 to 25 August 2004.
The FTSE index is composed of the 100 most capitalized British compa-
nies that are listed at the London Stock Exchange. On the other hand, the
FTSE SMALL CAP index is composed of the next 350 issues that are ranked
immediately below the FTSE 100 and FTSE 250. The minimum size of the
component stocks of this index is reviewed annually.
Return series are obtained by taking first differences in the log prices of
the three markets. The common test of unit roots (Dickey and Fuller, 1981;
Philips and Perron, 1988) offered no doubt about this point. The accumu-
lated weekly Treasury bill repo rate of each country is used as the risk free
interest rate.
Despite the fact that all the indices are composed by the most liquid
stocks traded in the Stock Exchange of each country, weekly frequency is
used to overcome possible problems associated with thin trading. In order
to transform daily data to weekly frequency, Wednesday closing values, or
the previous day if the Wednesday is not a trading day, are used.