Advances in Risk Management

HAYETTE GATFAOUI 119

and correlation coefficientρ(t,It). On the other hand, the greater beta is,
the higher firm value’s volatility is for fixedλ. An increase in firm’s global
volatility can result from short-term capital movements as well as short-
terminvestmentsamongothers. Moreover, Savickas(2003)focusesonevent-
induced variance increases while underlining the stochastic feature of asset
returns’ volatility. Specifically, the occurrence of given events in the market
often engenders increases in volatility of asset returns. In contrast, the higher
beta is, the lower the correlation coefficient becomes (Table 6.1). Notice that
the idiosyncratic risk factorItdepends only onλand not onβ.
SinceIis independent ofβ, its average simulated values are 2.10, 1.50 and
0.60whenλis0.2, 1and5respectively. First, theaveragelevelofidiosyncratic

0

(^113226339452585678791904101711301243135614691582169518081921203421472260237324862599271228252938305131643277339035033616)
Time (days)
4
3.5
3
2.5
2
1.5
1
0
0.5
Volatility (10 years)
Beta 0 Beta  0.5 Beta  1 Beta  1.5
Figure 6.2Simulated volatility whenλ= 1
0
(^113226339452586678791904101711301243135614691582169518081921203421472260237324862599271228252938305131643277339035033616)
Time (days)
2.5
2
1.5
Volatility (10 years)
1
0
0.5
Beta 0 Beta  0.5 Beta  1 Beta  1.5
Figure 6.3Simulated volatility whenλ= 5