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Equity portfolio diversification with high frequency data
journal contribution
posted on 2023-05-18, 05:21 authored by Alexeev, V, Dungey, MInvestors 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.
History
Publication title
Quantitative FinanceVolume
15Issue
7Pagination
1205-1215ISSN
1469-7688Department/School
TSBEPublisher
RoutledgePlace of publication
United KingdomRights statement
Copyright 2014 Taylor & FrancisRepository Status
- Restricted