Equity portfolio diversification with high frequency data

Vitali Alexeev*, Mardi Dungey

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    16 Citations (Scopus)

    Abstract

    Investors wishing to achieve a particular level of diversification may be misled on how many stocks to hold in a portfolio by assessing the portfolio risk at different data frequencies. High frequency intradaily data provide better estimates of volatility, which translate to more accurate assessment of portfolio risk. Using 5-min, daily and weekly data on S&P500 constituents for the period from 2003 to 2011, we find that for an average investor wishing to diversify away 85% (90%) of the risk, equally weighted portfolios of 7 (10) stocks will suffice, irrespective of the data frequency used or the time period considered. However, to assure investors of a desired level of diversification 90% of the time (in contrast to on average), using low frequency data results in an exaggerated number of stocks in a portfolio when compared with the recommendation based on 5-min data. This difference is magnified during periods when financial markets are in distress, as much as doubling during the 2007–2009 financial crisis.

    Original languageEnglish
    Pages (from-to)1205-1215
    Number of pages11
    JournalQuantitative Finance
    Volume15
    Issue number7
    DOIs
    Publication statusPublished - 3 Jul 2015

    Fingerprint

    Dive into the research topics of 'Equity portfolio diversification with high frequency data'. Together they form a unique fingerprint.

    Cite this