Diversification effect of commodity futures on financial markets

Takashi Kanamura; Takashi Kanamura

doi:10.3934/QFE.2018.4.821

Quantitative Finance and Economics

2018, Volume 2, Issue 4: 821-836. doi: 10.3934/QFE.2018.4.821

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Diversification effect of commodity futures on financial markets

Takashi Kanamura ^,

Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS), Kyoto University,1, Yoshida-Nakaadachi-cho, Sakyo-ku, Kyoto 606-8306, JAPAN

Received: 21 July 2017 Accepted: 15 November 2017 Published: 25 October 2018
JEL Codes: C19, G19, Q02

This paper examines the portfolio diversification effect of commodity futures on financial market products introducing a comprehensive evaluation standard of risk standardization, robustly small correlation, and risk-return tradeo. Regarding risk standardization, we propose a definition of portfolio diversification as how much the distribution of portfolio returns is close to a normal distribution. It is shown by using an ɑ-stable distribution that if commodity price return distribution has the opposite sign of skewness parameter β to financial portfolio's β, commodity diversification e ect exists. The empirical studies using S & P 500, U.S. 10-year treasury notes, and DJ-AIG commodity index are conducted to investigate the portfolio diversification e ects. The parameter estimation results of portfolio return distributions, the conditional correlations using the dynamic conditional correlation model with financial exogenous variables, and the e cient frontier from the mean-CVaR portfolio optimization all suggest that commodity futures have a diversification e ect on financial markets.
Citation: Takashi Kanamura. Diversification effect of commodity futures on financial markets[J]. Quantitative Finance and Economics, 2018, 2(4): 821-836. doi: 10.3934/QFE.2018.4.821

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Abstract

This paper examines the portfolio diversification effect of commodity futures on financial market products introducing a comprehensive evaluation standard of risk standardization, robustly small correlation, and risk-return tradeo. Regarding risk standardization, we propose a definition of portfolio diversification as how much the distribution of portfolio returns is close to a normal distribution. It is shown by using an ɑ-stable distribution that if commodity price return distribution has the opposite sign of skewness parameter β to financial portfolio's β, commodity diversification e ect exists. The empirical studies using S & P 500, U.S. 10-year treasury notes, and DJ-AIG commodity index are conducted to investigate the portfolio diversification e ects. The parameter estimation results of portfolio return distributions, the conditional correlations using the dynamic conditional correlation model with financial exogenous variables, and the e cient frontier from the mean-CVaR portfolio optimization all suggest that commodity futures have a diversification e ect on financial markets.

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