Skip to main content

LUP Student Papers

LUND UNIVERSITY LIBRARIES

Does rising market volatility undermine sector-level diversification in the Nordic equity market?

Hellström, Hugo LU (2026) NEKH03 20252
Department of Economics
Abstract
Diversification reduces portfolio risk when assets are imperfectly correlated, yet evidence suggests that correlations rise in turbulent markets and weaken diversification benefits. This thesis examines whether market volatility undermines sector-level diversification in the Nordic equity market and whether any sector remain resilient. Using daily data for ten Nordic sector indices, the analysis applies a regime based design centered on the COVID-19 volatility peak and estimates sector risk exposures with an extended CAPM including changes in implied volatility (ΔVIX), complemented by correlation measures and Fisher r-to-z tests. Results show that sector to market correlations and market betas increase significantly in periods with high... (More)
Diversification reduces portfolio risk when assets are imperfectly correlated, yet evidence suggests that correlations rise in turbulent markets and weaken diversification benefits. This thesis examines whether market volatility undermines sector-level diversification in the Nordic equity market and whether any sector remain resilient. Using daily data for ten Nordic sector indices, the analysis applies a regime based design centered on the COVID-19 volatility peak and estimates sector risk exposures with an extended CAPM including changes in implied volatility (ΔVIX), complemented by correlation measures and Fisher r-to-z tests. Results show that sector to market correlations and market betas increase significantly in periods with high volatility for most sectors, indicating deteriorating diversification benefits, while Healthcare displays comparatively stable exposure and no significant correlation increase. The findings imply that diversification in Nordic equities is state dependent and that tilting portfolios towards defensive sectors may help preserve risk reduction during periods of market stress. (Less)
Please use this url to cite or link to this publication:
author
Hellström, Hugo LU
supervisor
organization
course
NEKH03 20252
year
type
M2 - Bachelor Degree
subject
keywords
Sector diversification, Market volatility, Nordic equity market, Time-varying correlations, VIX
language
English
id
9221684
date added to LUP
2026-02-04 08:25:14
date last changed
2026-02-04 08:25:14
@misc{9221684,
  abstract     = {{Diversification reduces portfolio risk when assets are imperfectly correlated, yet evidence suggests that correlations rise in turbulent markets and weaken diversification benefits. This thesis examines whether market volatility undermines sector-level diversification in the Nordic equity market and whether any sector remain resilient. Using daily data for ten Nordic sector indices, the analysis applies a regime based design centered on the COVID-19 volatility peak and estimates sector risk exposures with an extended CAPM including changes in implied volatility (ΔVIX), complemented by correlation measures and Fisher r-to-z tests. Results show that sector to market correlations and market betas increase significantly in periods with high volatility for most sectors, indicating deteriorating diversification benefits, while Healthcare displays comparatively stable exposure and no significant correlation increase. The findings imply that diversification in Nordic equities is state dependent and that tilting portfolios towards defensive sectors may help preserve risk reduction during periods of market stress.}},
  author       = {{Hellström, Hugo}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Does rising market volatility undermine sector-level diversification in the Nordic equity market?}},
  year         = {{2026}},
}