South African Journal of Economic and Management Sciences
On-line version ISSN 1015-8812
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 1015-8812. 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.