Portfolio Selection with Commodities Under Conditional Copulas and Skew Preferences

Quantitative Finance (Forthcoming)

41 Pages Posted: 19 Apr 2012 Last revised: 2 Aug 2014

See all articles by Carlos G. Pedraz

Carlos G. Pedraz

Banco de España

Manuel Moreno

University of Castilla-La Mancha

Juan Ignacio Peña

Universidad Carlos III de Madrid

Date Written: June 17, 2014

Abstract

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.

Keywords: Portfolio selection, commodity futures, conditional copulas, skew preferences

JEL Classification: C46, G11, G13

Suggested Citation

G. Pedraz, Carlos and Moreno Fuentes, Manuel and Peña, Juan Ignacio, Portfolio Selection with Commodities Under Conditional Copulas and Skew Preferences (June 17, 2014). Quantitative Finance (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2041465 or http://dx.doi.org/10.2139/ssrn.2041465

Carlos G. Pedraz (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Manuel Moreno Fuentes

University of Castilla-La Mancha ( email )

Cobertizo San Pedro Martir s/n
Toledo, Toledo 45071
Spain

Juan Ignacio Peña

Universidad Carlos III de Madrid ( email )

Avenida de Madrid, 126
Getafe, Madrid 28903
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
386
Abstract Views
1,794
Rank
144,206
PlumX Metrics