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Volatility Trends and Optimal Portfolios: the Case of Agricultural Commodities

  • Antonios Antypas

    (Department of Banking and Financial Management, University of Piraeus)

  • Phoebe Koundouri

    (Dept. of International and European Economic Studies, Athens University of Economics and Business)

  • Nikolaos Kourogenis


    (Department of Banking and Financial Management, University of Piraeus.)

While the financial world is experiencing a crisis, the prices of most agricultural commodities have remained high, although exhibiting extreme volatilidy. Motivated by evidence showing that volatility trends are present in agricultural commodity prices, we analyze stochastic processes whose unconditional variance changes with time. This analysis suggests a semi-parametric model for capturing the trending behavior of second moments, in which these moments are polynomial-like functions of time. Based on this model, we formulate the portfolio problem faced by an investor when the variances and the covariances of the returns of the available assets are trending. Then, we obtain an approximate solution of the problem, which is based on the consistent estimation of the order of variance-covariance growth and apply it for the construction of an optimal portfolio of agricultural commodities. It is shown that the performance of this portfolio is superior to those of alternative portfolios which are formed by employing methods not accounting for the presence of volatility trends in commodity returns.

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Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1113.

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Handle: RePEc:aue:wpaper:1113
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  14. Ray, Daryll E. & Richardson, James W. & Torre Ugarte, Daniel de la & Tiller, Kelly, 1998. "Estimating Price Variability In Agriculture: Implications For Decision Makers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
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