Research article Special Issues

Diversification effect of commodity futures on financial markets

  • 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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  • 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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    © 2018 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
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