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Econometrics 2016, 4(2), 27; doi:10.3390/econometrics4020027

Continuous and Jump Betas: Implications for Portfolio Diversification

1
Tasmanian School of Business and Economics, University of Tasmania, Hobart TAS 7001, Australia
2
Discipline of Finance, Business School, University of Technology Sydney, Sydney NSW 2007, Australia
3
Department of Economics, Faculty of Business and Law, Deakin University, Burwood VIC 3125, Australia
*
Author to whom correspondence should be addressed.
Academic Editor: Nikolaus Hautsch
Received: 29 February 2016 / Revised: 18 May 2016 / Accepted: 25 May 2016 / Published: 1 June 2016
(This article belongs to the Special Issue Financial High-Frequency Data)
View Full-Text   |   Download PDF [405 KB, uploaded 1 June 2016]   |  

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. View Full-Text
Keywords: systematic risk; jump diffusion; portfolio diversification; high-frequency data systematic risk; jump diffusion; portfolio diversification; high-frequency data
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Alexeev, V.; Dungey, M.; Yao, W. Continuous and Jump Betas: Implications for Portfolio Diversification. Econometrics 2016, 4, 27.

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