Firm-level return dispersion and correlation asymmetry: challenges for portfolio diversification
AbstractThe main purpose of this article is to study whether firm-level return dispersions might have any significance in explaining asymmetric return correlations observed in equity market returns. Correlation asymmetry, in particular increased return correlations conditional on downside moves, implies that portfolio diversification will not be as successful during bear markets - periods during which portfolio diversification will be most needed. Similarly, low firm-level return dispersion imply that stocks within the portfolio behave the same way, making diversification harder. It is found that asymmetric correlations are associated with asymmetric firm-level return dispersions. The results indicate that portfolio managers need to not only take into account the asymmetry in return correlations but also be aware of how firm-level return dispersions behave during such periods when they need diversification most.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 14 (2004)
Issue (Month): 6 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAFE20
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001.
"Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,"
3128707, Harvard University Department of Economics.
- John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
- John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc.
- Fisher, Lawrence & Lorie, James H, 1970. "Some Studies of Variability of Returns on Investments in Common Stocks," The Journal of Business, University of Chicago Press, vol. 43(2), pages 99-134, April.
- Aneja, Yash P & Chandra, Ramesh & Gunay, Erdal, 1989. " A Portfolio Approach to Estimating the Average Correlation Coefficient for the Constant Correlation Model," Journal of Finance, American Finance Association, vol. 44(5), pages 1435-38, December.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-62, June.
- Haugen, Robert A & Talmor, Eli & Torous, Walter N, 1991. " The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns," Journal of Finance, American Finance Association, vol. 46(3), pages 985-1007, July.
- Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
- Marc Joëts, 2013.
"Energy price transmissions during extreme movements,"
2013-028, Department of Research, Ipag Business School.
- Marc Joëts, 2012. "Energy price transmissions during extreme movements," EconomiX Working Papers 2012-38, University of Paris West - Nanterre la Défense, EconomiX.
- repec:ipg:wpaper:28 is not listed on IDEAS
- Stavros Degiannakis & Andreas Andrikopoulos & Timotheos Angelidis & Christos Floros, 2013. "Return dispersion, stock market liquidity and aggregate economic activity," Working Papers 166, Bank of Greece.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.