The Reality of Stock Market Jumps Diversification (with Internet Appendix)
49 Pages Posted: 14 Feb 2017 Last revised: 17 Nov 2017
Date Written: February 15, 2017
We propose a non-parametric procedure for estimating systemic co-jumps and independent idiosyncratic jumps, and study associated news reported in Factiva and Bloomberg for thirty five stock markets from 1988 to 2014. Our results suggest that it is important to distinguish between systemic co-jumps and idiosyncratic jumps. We find idiosyncratic jumps to have economically significant impact on portfolios weights involving emerging markets. Both jumps have important implications for home-bias investors. Our news analysis suggests systemic jumps are typically caused by currency crises, sectoral failure, liquidity issues, and deteriorating economic climate, while idiosyncratic jumps are caused by political unrest, currency instability, and large firm effects on small economies. Many of the idiosyncratic jumps in fact originate from the same source but impact different stock markets at different times and levels.
Keywords: Asset allocation, international portfolio diversification, home bias, systemic and idiosyncratic jumps, jump news
JEL Classification: G11, G15
Suggested Citation: Suggested Citation