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Downside risk and portfolio diversification in the euro-zone equity markets with special consideration of the crisis period

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  • Liu, Tengdong
  • Hammoudeh, Shawkat
  • Santos, Paulo Araújo

Abstract

This study examines the Value-at-Risk for ten euro-zone equity markets individually and also divided into two groups: PIIGS (Portugal, Italy, Ireland, Greece and Spain) and the Core (Austria, Finland, France, Germany and the Netherlands), employing four VaR estimation and evaluation methods considered over the full period and the pre- and post-global crisis subperiods 1 and 2. The backtesting results are also evaluated according to the Basel capital requirements. The results demonstrate that the CEVT methods meet all the statistical criteria the best for most individual equity indices over the full period, but these results over the two subperiods for those two methods are mixed, compared to those the DPOT methods. Moreover, the two optimal group portfolios of the PIIGS and the Core as well as the grand portfolio that combines the ten indices do not show much diversification benefits. The PIIGS portfolio selects Spain's IBEX only, while that of the Core opts for Austria's ATX only in the full period and subperiod 1. However, Germany's DAX overwhelmingly dominates both the Core and the Grand portfolios in subperiod 2.

Suggested Citation

  • Liu, Tengdong & Hammoudeh, Shawkat & Santos, Paulo Araújo, 2014. "Downside risk and portfolio diversification in the euro-zone equity markets with special consideration of the crisis period," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 47-68.
  • Handle: RePEc:eee:jimfin:v:44:y:2014:i:c:p:47-68
    DOI: 10.1016/j.jimonfin.2014.01.006
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    References listed on IDEAS

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    1. repec:eee:intfin:v:50:y:2017:i:c:p:1-12 is not listed on IDEAS
    2. Alexander, Carol & Korovilas, Dimitris & Kapraun, Julia, 2016. "Diversification with volatility products," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 213-235.
    3. Mensi, Walid & Hammoudeh, Shawkat & Nguyen, Duc Khuong & Kang, Sang Hoon, 2016. "Global financial crisis and spillover effects among the U.S. and BRICS stock markets," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 257-276.

    More about this item

    Keywords

    Value at risk; Euro-zone equity markets; Augmented portfolios; Subperiods;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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