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Continuous and Jump Betas: Implications for Portfolio Diversification

Listed author(s):
  • Vitali Alexeev

    ()

    (Tasmanian School of Business and Economics, University of Tasmania, Hobart TAS 7001, Australia
    Discipline of Finance, Business School, University of Technology Sydney, Sydney NSW 2007, Australia)

  • Mardi Dungey

    ()

    (Tasmanian School of Business and Economics, University of Tasmania, Hobart TAS 7001, Australia)

  • Wenying Yao

    ()

    (Tasmanian School of Business and Economics, University of Tasmania, Hobart TAS 7001, Australia
    Department of Economics, Faculty of Business and Law, Deakin University, Burwood VIC 3125, Australia)

Using high-frequency data, we decompose the time-varying beta for stocks into beta for continuous systematic risk and beta for discontinuous systematic risk. Estimated discontinuous betas for S&P500 constituents between 2003 and 2011 generally exceed the corresponding continuous betas. We demonstrate how continuous and discontinuous betas decrease with portfolio diversification. Using an equiweighted broad market index, we assess the speed of convergence of continuous and discontinuous betas in portfolios of stocks as the number of holdings increase. We show that discontinuous risk dissipates faster with fewer stocks in a portfolio compared to its continuous counterpart.

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Article provided by MDPI, Open Access Journal in its journal Econometrics.

Volume (Year): 4 (2016)
Issue (Month): 2 (June)
Pages: 1-15

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Handle: RePEc:gam:jecnmx:v:4:y:2016:i:2:p:27-:d:71231
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