Original Research

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

André Heymans, Wayne Peter Brewer
South African Journal of Economic and Management Sciences | Vol 18, No 2 | a1165 | DOI: https://doi.org/10.4102/sajems.v18i2.1165 | © 2015 André Heymans, Wayne Peter Brewer | This work is licensed under CC Attribution 4.0
Submitted: 14 July 2014 | Published: 28 May 2015

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André Heymans, North-West University, South Africa
Wayne Peter Brewer, North-West University, South Africa

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Abstract

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.



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