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Continuous and Jump Betas: Implications for Portfolio Diversification

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Vitali Alexeev & Mardi Dungey & Wenying Yao, 2016. "Continuous and Jump Betas: Implications for Portfolio Diversification," Econometrics, MDPI, Open Access Journal, vol. 4(2), pages 1-15, June.
  • Handle: RePEc:gam:jecnmx:v:4:y:2016:i:2:p:27-:d:71231
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    References listed on IDEAS

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    Cited by:

    1. Sayaeed, Mohammad Abu & Dungey, Mardi & Yao, Wenying, 2015. "High frequency characterization of Indian banking stocks," Working Papers 2015-04, University of Tasmania, Tasmanian School of Business and Economics.

    More about this item

    Keywords

    systematic risk; jump diffusion; portfolio diversification; high-frequency data;

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C - Mathematical and Quantitative Methods
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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