Download This PaperAsymmetric Jump Beta Estimation with Implications for Portfolio Risk Management
Alexeev, V., Urga, G., & Yao, W. (2019). Asymmetric jump beta estimation with implications for portfolio risk management. International Review of Economics & Finance, 62, 20–40. doi:10.1016/j.iref.2019.02.014
47 Pages Posted: 5 Aug 2019
Date Written: February 23, 2019
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
JEL Classification: C58, G11, C61
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