Abstract

HEYMANS, André  and  BREWER, Wayne Peter. The influence of volatility spill-overs and market beta on portfolio construction. S. Afr. j. econ. manag. sci. [online]. 2015, vol.18, n.2, pp.277-290. ISSN 2222-3436.  http://dx.doi.org/10.17159/2222-3436/2015/v18n2a10.

This study adds to Modern Portfolio Theory (MPT) by providing an additional measure to market beta in constructing a more efficient investment portfolio. The additional measure analyses the volatility spill-over effects among stocks within the same portfolio. Using intraday stock returns from five top-40 listed stocks on the JSE between July 2008 and April 2010, volatility spill-over effects were estimated with a residual- based test (aggregate shock [AS] model) framework. It is shown that when a particular stock attracted fewer volatility spill-over effects from the other stocks in the portfolio, the overall portfolio volatility decreased as well. In most cases market beta showcased similar results. Therefore, in order to construct a more efficient risk- adjusted portfolio, one requires both a portfolio that has a unit correlation with the market (beta-based), and stocks that showcase the least amount of volatility spill-over effects amongst one another. These results might assist portfolio managers to construct lower mean variance portfolios.

Keywords : modern portfolio theory; EMH; beta; volatility spill-over effects.

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