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The dynamic connectedness between collateralized loan obligations and major asset classes: a TVP-VAR approach and portfolio hedging strategies for investors

Author

Listed:
  • Spyros Papathanasiou

    (National and Kapodistrian University of Athens)

  • Dimitris Kenourgios

    (National and Kapodistrian University of Athens)

  • Drosos Koutsokostas

    (National and Kapodistrian University of Athens)

  • Georgios Pergeris

    (National and Kapodistrian University of Athens)

Abstract

Motivated by the increasing demand for alternative assets that can contribute to reducing portfolio risk, this paper examines the volatility spillovers between collateralized loan obligations (CLOs) and various in-demand investment instruments, including equities, bonds, crude oil, commodities, gold, bitcoin, shipping and real estate. The applied methodology comprehends the time-varying parameter vector autoregressive (TVP-VAR) modification of the classical spillover approach, for the period from January 1, 2012, to August 31, 2023. The empirical findings show moderate levels of dynamic connectedness; albeit several external shocks strengthened the interconnection among the assets. Moreover, we compare the ability of CLOs for hedging, during the overall sample period and multiple subperiods, by estimating hedge ratios and optimal portfolio weights, in order to inform investors about feasible portfolio adjustments. Our results indicate that CLOs constitute an effective hedging tool, irrespective of the period covered, as the short position in their volatility provides high hedging effectiveness for investors holding long positions in the volatility of all the remaining assets.

Suggested Citation

  • Spyros Papathanasiou & Dimitris Kenourgios & Drosos Koutsokostas & Georgios Pergeris, 2024. "The dynamic connectedness between collateralized loan obligations and major asset classes: a TVP-VAR approach and portfolio hedging strategies for investors," Empirical Economics, Springer, vol. 67(3), pages 1063-1089, September.
    • Handle: RePEc:spr:empeco:v:67:y:2024:i:3:d:10.1007_s00181-024-02583-2
    DOI: 10.1007/s00181-024-02583-2
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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