Asymmetric 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

See all articles by Vitali Alexeev

Vitali Alexeev

University of Technology Sydney

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ; and Universita' di Bergamo, Italy

Wenying Yao

University of Melbourne - Melbourne Business School

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

Suggested Citation

Alexeev, Vitali and Urga, Giovanni and Yao, Wenying, Asymmetric Jump Beta Estimation with Implications for Portfolio Risk Management (February 23, 2019). 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, Available at SSRN: https://ssrn.com/abstract=3430057

Vitali Alexeev (Contact Author)

University of Technology Sydney ( email )

UTS Business School
PO Box 123, Broadway
Sydney, NSW
Australia

HOME PAGE: http://valexeev.yolasite.com

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ( email )

108 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 8698 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/giovanni-urga

and Universita' di Bergamo, Italy ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

Wenying Yao

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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