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To What Extent Diversifying when Theran Stock Market is High Volatile, will Reduce Risk?

Mohammadi, Elham | 2014

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 45987 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Keshavarz Haddad, Gholamreza
  7. Abstract:
  8. Investment diversifiying is one of risk management technique. In this research, We investigate diversifiying in a case that stock market is high volatile, e.i. There are large movements in stock returns. Empirical researches show that inhigh volatile market, conditional correlation between returns is stronger, so diversifiying cant reduce risk. For evaluating this claim in Iranian financial asset market, We estimate quantiles of stock return distribution in 10%, 25%, 90% and 75% levels by Kernel density and GARCH models.Then, We find average conditional correlation, error variance and conditional CAPM to test the possibility of reducing Non-systematic and systematic risk. Analytical results show that the average correlation in the lower tail is much higher than that in the middle distribution and, contrary to what was found in the literature using volatility models the average correlation in the upper tail is not significantly different from that in the middle. Moreover, the average of error variances and the portfolio beta are very unstable and can be much higher in the lower tail and middle than those in the upper tail of the distribution. In conclusion study suggest that portfolio diversification will not be successful in the bear market
  9. Keywords:
  10. Capital Asset Pricing Model (CAPM) ; High Volatile Stock Market ; Conditional Correlation ; Bull and Bear Market ; Systematic Risk

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