n South African Journal of Economic and Management Sciences - The influence of volatility spill-overs and market beta on portfolio construction
|Article Title||The influence of volatility spill-overs and market beta on portfolio construction|
|© Publisher:||University of Pretoria|
|Journal||South African Journal of Economic and Management Sciences|
|Affiliations||1 North-West University and 2 North-West University|
|Publication Date||Jan 2015|
|Pages||277 - 290|
|Keyword(s)||Beta, C15, C22, EMH, G11, Modern portfolio theory and Volatility spill-over effects|
ISI Social Science
This study adds to Modern Portfolio Theory (MPT) by providing an additional measure to market beta in constructing a more efficient investment portfolio. The additional measure analyses the volatility spill-over effects among stocks within the same portfolio. Using intraday stock returns from five top-40 listed stocks on the JSE between July 2008 and April 2010, volatility spill-over effects were estimated with a residual-based test (aggregate shock [AS] model) framework. It is shown that when a particular stock attracted fewer volatility spill-over effects from the other stocks in the portfolio, the overall portfolio volatility decreased as well. In most cases market beta showcased similar results. Therefore, in order to construct a more efficient risk-adjusted portfolio, one requires both a portfolio that has a unit correlation with the market (beta-based), and stocks that showcase the least amount of volatility spill-over effects amongst one another. These results might assist portfolio managers to construct lower mean variance portfolios.
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