TY - JOUR
T1 - Equity portfolio diversification with high frequency data
AU - Alexeev, Vitali
AU - Dungey, Mardi
N1 - Publisher Copyright:
© 2014 Taylor & Francis.
PY - 2015/7/3
Y1 - 2015/7/3
N2 - 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.
AB - 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.
KW - High frequency
KW - Portfolio diversification
KW - Realized correlation
KW - Realized variance
UR - http://www.scopus.com/inward/record.url?scp=84930577615&partnerID=8YFLogxK
U2 - 10.1080/14697688.2014.973898
DO - 10.1080/14697688.2014.973898
M3 - Article
SN - 1469-7688
VL - 15
SP - 1205
EP - 1215
JO - Quantitative Finance
JF - Quantitative Finance
IS - 7
ER -