Empirical Studies on Concentration Risk

Based on an empirical analysis of stock market indices, [28] investigate the possible range of asset correlations within and across developed and emerging economies. They perform a principal component analysis (PCA) of the individual stock market index returns in developed and emerging economies to underpin the argument that there is rarely only a single risk factor which affects all obligors in the same way and to the same extent. [28] show that there are multiple factors that affect developed and emerging economies and that these factors are not the same in both economies. In particular, they show that a single factor accounts for only 77.5% of the variability of the developed markets, and three factors are required to explain more than 90% while for emerging markets the first factor accounts for only 47% of variability and seven factors are required to explain more than 90%.