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Asymmetric jump beta estimation with implications for portfolio risk management

Alexeev, V., Urga, G. and Yao, W. (2019). Asymmetric jump beta estimation with implications for portfolio risk management. International Review of Economics and Finance, 62, doi: 10.1016/j.iref.2019.02.014

Abstract

We evaluate the impact of extreme market shifts on equity portfolios and study the differ-ence in negative and positive reactions to market jumps with implications for portfolio riskmanagement. Employing high-frequency data for the constituents of the S&P500 index overthe period 2 January 2003 to 30 December 2017, we investigate to what extent the portfolioexposure to the downside and upside jumps can be mitigated. We contrast the risk exposureof individual stocks with those of the portfolios as the number of holdings increases. Varyingthe jump identification threshold, we show that the number of holdings required to stabiliseportfolios’ sensitivities to negative jumps is higher than when positive jumps are consideredand that the asymmetry is more prominent for more extreme events. Ignoring this asymme-try results in under-diversification of portfolios and increases exposure to sudden extremenegative market shifts.

Publication Type: Article
Additional Information: © Elsevier 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Asymmetric jumps, Systematic risk, Portfolio diversification, Value-at-Risk
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: https://openaccess.city.ac.uk/id/eprint/23246
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