Cojumps and asset allocation in international equity markets

Abstract

This paper examines the patterns of intraday cojumps between international equity markets as well as their impact on international asset holdings and portfolio diversification benefits. Using intraday index-based data for exchange-traded funds as proxies for international equity markets, we document evidence of significant cojumps, with the intensity increasing during the global financial crisis of 2008-2009. The application of the Hawkes process also shows that jumps propagate from the US and other developed markets to emerging markets. Correlated jumps are found to reduce diversification benefits and foreign asset holdings in minimum risk portfolios, whereas idiosyncratic jumps increase the diversification benefits of international equity portfolios. In contrast, the impact of higher-order moments induced by idiosyncratic and systematic jumps on the optimal composition of international portfolios is not significant.

Dynamics of return and liquidity (co) jumps in emerging foreign exchange markets

“…We employ the intraday jump detection procedure developed by Lee and Mykland (2008) to identify both return and liquidity jumps. Among the variety of jump detection methodologies, this procedure is particularly useful since it determines the size, direction and exact timestamp of each jump (Neely, 2011;Boudt and Petitjean, 2014;Arouri et al, 2019). This identification further allows calculation of average and total jump sizes or jump intensities within lower frequencies to make daily or monthly analysis.…”

If worst comes to worst: Co-movement of global stock markets in the US-China trade war

“…Risk-averse investors typically hold internationally diversified assets in their portfolios to avoid negative (idiosyncratic) market downturns (Arouri 2019). Lahaye et al (2010) show that stock market co-movement is strongly associated with macroeconomic news announcements.…”