The Relevance of Return and Volatility Spillovers for Portfolio Diversification
43 Pages Posted: 5 Jun 2019
Date Written: May 17, 2019
There is a large literature on return and volatility spillovers between assets. Google Scholar yields about 9,000 articles based on the search term “volatility spillover” and about 1,000 articles on the search term “return spillover”. However, the relevance of these spillovers on portfolio diversification is rarely assessed. This paper provides such an analysis and finds that spillovers are generally irrelevant for portfolio diversification, i.e. return, variance and covariance estimates are sufficient to build a portfolio and spillovers explain only a small and negligible part. The study shows that effects of spillovers on portfolio formation are fully captured by returns, correlations and variances at equal and higher frequency levels and that spillovers do not have strong portfolio implications.
Keywords: spillovers, return spillovers, volatility spillovers, correlations, portfolio diversification
JEL Classification: C32, C5, G11, G15
Suggested Citation: Suggested Citation