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An analysis of diversification benefits of commodity futures using Markov regime-switching approach

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  • Ritika Jaiswal
  • Rashmi Uchil

Abstract

This study investigates the hedge and safe haven properties of individual commodity futures against stock market movements using a nonlinear regime-switching framework. Based on the results of Brock, Dechert and Scheinkman (BDS) test and information selection criterion, Markov-switching vector auto-regression (MS-VAR) model is applied with three regimes for gold and silver futures and with two regimes for crude oil, copper and zinc futures. The results demonstrate strong hedge and weak safe haven property of gold and silver futures, while it shows a weak hedge and weak safe haven potential of copper and zinc futures. Conversely, crude oil futures cannot be used as a safe haven against extreme stock market movements. In addition, portfolio analysis confirms that these findings provide significant information to investors for the construction of better risk-adjusted return portfolio.

Suggested Citation

  • Ritika Jaiswal & Rashmi Uchil, 2018. "An analysis of diversification benefits of commodity futures using Markov regime-switching approach," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 8(1), pages 20-47.
    • Handle: RePEc:ids:afasfa:v:8:y:2018:i:1:p:20-47
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    Cited by:

    1. Jochen Güntner & Benjamin Karner, 2020. "Hedging with commodity futures and the end of normal Backwardation," Economics working papers 2020-21, Department of Economics, Johannes Kepler University Linz, Austria.

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