South African Journal of Economic and Management Sciences (May 2015)

The influence of volatility spill-overs and market beta on portfolio construction

  • André Heymans,
  • Wayne Peter Brewer

DOI
https://doi.org/10.4102/sajems.v18i2.1165
Journal volume & issue
Vol. 18, no. 2
pp. 277 – 290

Abstract

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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.