The Effects of Systemic Risk on the Allocation between Value and Growth Portfolios


Given the striking effects of the recent financial turmoil, and the importance of value and growth portfolios for both local and international portfolio allocation, we investigate the effects of systemic jumps on the optimal portfolio investment strategies across value and growth equity portfolios. We find that the cost of ignoring systemic jumps is not substantial, unless the portfolio is highly levered and the average size amplitude of the jump is large enough. From the optimal asset allocation point of view, it seems more important the effects of few but relatively large jumps than highly frequent but small jumps. Indeed, the period in which the value premium is higher coincides with a period of few, but large and positive average size jumps for value stocks, and negative and very large average size jumps for growth stocks.

Share and Cite:

G. Penagos and G. Rubio, "The Effects of Systemic Risk on the Allocation between Value and Growth Portfolios," Journal of Mathematical Finance, Vol. 3 No. 1A, 2013, pp. 165-180. doi: 10.4236/jmf.2013.31A016.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] L. Zhang, “The Value Premium,” Journal of Finance, Vol. 60, No. 1, 2005, pp. 67-103. doi:10.1111/j.1540-6261.2005.00725.x
[2] M. Yogo, “A Consumption-Based Explanation of Expected Stock Returns,” Journal of Finance, Vol. 61, No. 2, 2006, pp. 539-580. doi:10.1111/j.1540-6261.2006.00848.x
[3] F. Belo, C. Xue and L. Zhang, “The Value Spread: A Puzzle,” Working Paper, Ohio State University, 2010.
[4] L. Chen and L. Zhang, “A Better Three-Factor Model that Explains More Anomalies,” Journal of Finance, Vol. 65, No. 2, 2009, pp. 563-594.
[5] Squam Lake Report Group, “Fixing the Financial System,” Princeton University Press, New York, 2010.
[6] S. Das and R. Uppal, “Systemic Risk and International Portfolio Choice,” Journal of Finance, Vol. 59, No. 6, 2004, pp. 2809-2834. doi:10.1111/j.1540-6261.2004.00717.x
[7] T. Andersen, L. Benzoni and J. Lund, “An Empirical Investigation of Continuous-Time Equity Return Models,” Journal of Finance, Vol. 57, No. 3, 2002, pp. 1239-1284. doi:10.1111/1540-6261.00460
[8] A. González, A. Novales and G. Rubio, “Efficient Method of Moments Estimation of Stochastic Volatility and Jumps in European Stock Market Return Indices,” Working Paper, Universidad CEU Cardenal Herrera, and Instituto Complutense de Análisis Económico (ICAE), 2011.
[9] R. C. Merton, “Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case,” The Review of Economics and Statistics, Vol. 51, No. 3, 1969, pp. 247-257. doi:10.2307/1926560
[10] D. Duffie, J. Pan and K. Singleton, “Transform Analysis and Asset Pricing for Affine Jump Diffusions,” Econometrica, Vol. 68, No. 6, 2000, pp. 1343-1376. doi:10.1111/1468-0262.00164
[11] E. Fama and K. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, Vol. 33, No. 1, 1993, pp. 3-56. doi:10.1016/0304-405X(93)90023-5
[12] R. Jagannathan and Z. Wang, “The Conditional CAPM and the Cross-Section of Expected Returns,” Journal of Finance, Vol. 51, No. 1, 1996, pp. 3-53. doi:10.1111/j.1540-6261.1996.tb05201.x

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.