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Asymmetric jump beta estimation with implications for portfolio risk management

Vitali Alexeev (), Giovanni Urga () and Wenying Yao ()

International Review of Economics & Finance, 2019, vol. 62, issue C, 20-40

Abstract: We evaluate the impact of extreme market shifts on equity portfolios and study the difference in negative and positive reactions to market jumps with implications for portfolio risk management. Employing high-frequency data for the constituents of the S&P500 index over the period 2 January 2003 to 30 December 2017, we investigate to what extent the portfolio exposure to the downside and upside jumps can be mitigated. We contrast the risk exposure of individual stocks with those of the portfolios as the number of holdings increases. Varying the jump identification threshold, we show that the number of holdings required to stabilise portfolios’ sensitivities to negative jumps is higher than when positive jumps are considered and that the asymmetry is more prominent for more extreme events. Ignoring this asymmetry results in under-diversification of portfolios and increases exposure to sudden extreme negative market shifts.

Keywords: Asymmetric jumps; Systematic risk; Portfolio diversification; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C58 G11 C61 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.iref.2019.02.014

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