Should (Co)jump variation be included in asset allocation?

Zirong Chen, Haonan Lin and Xu Zheng

Applied Economics Letters, 2022, vol. 29, issue 20, 1868-1875

Abstract: This study explores whether to introduce jump variation into asset allocation. Using the high-frequency data of constituents of the Dow Jones Industrial(DJI) 30 index, we construct global minimum variance portfolios based on two different covariation estimators: pre-averaged and pre-averaged truncated Hayashi-Yoshida estimators (PAYHE and PATHYE, respectively). By comparing the performance of two different portfolios consider jump or not, we find that eliminating jump variation yields a significantly higher Sharpe ratio, and results in a lower turnover and superior positions compared to incorporating the jump variation. Thesve improvements are also reflected in economic gains, and the huge economic gain mainly comes from the reduction in turnover.

Date: 2022
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DOI: 10.1080/13504851.2021.1963655

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