Portfolio Selection with Commodities Under Conditional Copulas and Skew Preferences
Universidad Carlos III de Madrid
University of Castilla-La Mancha
Juan Ignacio Peña
Universidad Carlos III de Madrid - Department of Business Administration
November 19, 2012
This article investigates the portfolio selection problem of an investor with three-moment preferences taking positions in commodity futures. To model the asset returns, we propose a conditional asymmetric t copula with skewed and fat-tailed marginal distributions, such that we can capture the impact on optimal portfolios of time-varying moments, state-dependent correlations, and tail and asymmetric dependence. In the empirical application with oil, gold, and equity data from 1990 to 2010, the conditional t copulas portfolios achieve better performance than those based on more conventional strategies. The specification of higher moments in the marginal distributions and the type of tail dependence in the copula have significant implications for the out-of-sample portfolio performance.
Number of Pages in PDF File: 40
Keywords: Portfolio selection, commodity futures, conditional copulas, skew preferences
JEL Classification: C46, G11, G13working papers series
Date posted: April 19, 2012 ; Last revised: November 19, 2012
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