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Volatility and correlation timing: The role of commodities

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  • Panos K. Pouliasis
  • Nikos C. Papapostolou

Abstract

This paper examines the role of commodities from the perspective of dynamic asset allocation. We model conditional second moments of stock, bond, and commodity futures and examine their impact on the portfolio choice decision of a risk‐averse investor in a mean‐variance framework. Findings suggest that adding commodities in the opportunity set enhances portfolio risk‐return characteristics and offers diversification benefits. Moreover, there is substantial economic value in both volatility and correlation timing strategies. Results are robust across various subperiods and rebalancing strategies: alternative correlation dynamics specifications, short‐sale constraints, and transaction costs under both in‐ and out‐of‐sample settings.

Suggested Citation

  • Panos K. Pouliasis & Nikos C. Papapostolou, 2018. "Volatility and correlation timing: The role of commodities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(11), pages 1407-1439, November.
  • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:11:p:1407-1439
    DOI: 10.1002/fut.21939
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    References listed on IDEAS

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    1. John L. G. Board & Charles M. S. Sutcliffe, 1994. "Estimation Methods in Portfolio Selection and the Effectiveness of Short Sales Restrictions: UK Evidence," Management Science, INFORMS, vol. 40(4), pages 516-534, April.
    2. Pasquale Della Corte & Lucio Sarno & Ilias Tsiakas, 2009. "An Economic Evaluation of Empirical Exchange Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3491-3530, September.
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    Cited by:

    1. Gagnon, Marie-Hélène & Manseau, Guillaume & Power, Gabriel J., 2020. "They're back! Post-financialization diversification benefits of commodities," International Review of Financial Analysis, Elsevier, vol. 71(C).
    2. 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.
    3. Panos K. Pouliasis & Ilias D. Visvikis & Nikos C. Papapostolou & Alexander A. Kryukov, 2020. "A novel risk management framework for natural gas markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 430-459, March.
    4. Fan, John Hua & Fernandez-Perez, Adrian & Indriawan, Ivan & Todorova, Neda, 2020. "Internationalization of futures markets: Lessons from China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).

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