Title: Asymmetric jump beta estimation with implications for portfolio risk management
Authors: Wenying Yao - Deakin University (Australia) [presenting]
Vitali Alexeev - University of Technology Sydney (Australia)
Giovanni Urga - Cass Business School (UK)
Abstract: The aim is to evaluate the impact of extreme market shifts on equity portfolios. Assuming that investors care differently about downside losses as opposed to upside gains, we estimate jump sensitivities for the negative and positive market shifts. We investigate the implications of the difference in negative and positive sensitivities to market jumps for portfolio risk management by contrasting the results for individual stocks with the results for portfolios with varying number of holdings. In the context of a portfolio, we investigate to what extent the downside and upside jump risks can be diversified away. This can have a direct impact on the pricing of jump risks and subsequently, investors' decision-making. Varying the jump identification threshold, we show that the asymmetry is more prominent for more extreme events and that the number of holdings required to diversify portfolios' sensitivities to negative jumps is higher than that required for positive jump diversification. We found that ignoring the asymmetry in sensitivities to negative versus positive market jumps may result in under-diversification of portfolios and increased exposure to extreme negative market shifts.