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Commodity Markets through the business cycle

Listed author(s):
  • Mathieu Gatumel

    (IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc)

  • Florian Ielpo

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

We introduce a new meaure of risk appetite in financial markets, based on the cross sectional behavior of excess returns. Turning them into probabilities through a Markov Switching model, we define one global risk appetite measure as the cross-sectional average of the individual probabilities for each asset to be in a " risk appetite " regime. Given the probabilistic approach that comes naturally with this Markov Switching framework, we present various tests to gauge the interest of the risk appetite measure that is presented here. Using these tests we show that our index behaves well vs. various competitors, especially in out-of-sample results. We test for the information content of various assets and find that a core of asset allocation-related assets provide the best possible choice over various competing specifications.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-01302479.

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Date of creation: 2014
Publication status: Published in Quantitative Finance, Taylor & Francis (Routledge), 2014, 14 (9), pp.1597-1618. 〈10.2139/ssrn.2334180〉
Handle: RePEc:hal:cesptp:hal-01302479
DOI: 10.2139/ssrn.2334180
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