The Relevance of Return and Volatility Spillovers for Portfolio Diversification

43 Pages Posted: 5 Jun 2019

See all articles by Dirk G. Baur

Dirk G. Baur

University of Western Australia - Business School; Financial Research Network (FIRN)

Lai T. Hoang

The University of Western Australia

Date Written: May 17, 2019

Abstract

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

Baur, Dirk G. and Hoang, Lai T., The Relevance of Return and Volatility Spillovers for Portfolio Diversification (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=3389644 or http://dx.doi.org/10.2139/ssrn.3389644

Dirk G. Baur (Contact Author)

University of Western Australia - Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lai T. Hoang

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
229
PlumX Metrics