Analysis of the daily local currency returns on 105 stocks from 11 European countries over the 1986-89 period reveals the importance of various market and sector factors to stock price volatility. Factor analysis, as well as an analysis of variance with currency, market and industry factors, show that national stock market factors clearly dominate stock price variances, even after adjusting for currency, world stock market, European stock market and industry trends.

The country factor explains 19% of the average stock variance. The impact of the world stock market is 11%, while overall European market trends explain an additional 8% and industry trends an additional 9%. The contribution of currencies is relatively minor at 2%.

These factors explain about 49% of the risk of European stocks. Virtually half of European stock return variance is specific. Individual stocks may, however, diverge from this pattern.