Realizing Correlations Across Asset Classes

48 Pages Posted: 2 Jan 2019

See all articles by Niels Groenborg

Niels Groenborg

School of Economics and Business Economics, Aarhus University; CREATES; Danish Finance Institute

Asger Lunde

Aarhus University - School of Economics and Management; CREATES

Kasper Olesen

CREATES; Bank of America - Bank of America Merrill Lynch

Harry Vander Elst

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management

Date Written: December 14, 2018

Abstract

We introduce a simple and intuitive approach of modeling and forecasting correlations for use in portfolio optimization. The model is composite in nature and consists of elements based on a bivariate realized volatility model. Importantly, our framework allows for volatility spill-overs between assets which provide an edge compared to competing models when forming portfolios. We apply the model to high-frequency data for commodity markets and demonstrate significant economic gains for an investor basing portfolio decisions on our modeling framework. This gain is significant in economic terms, even after imposing realistic constraints on short selling and portfolio turnover.

Keywords: commodities, futures markets, portfolio selection, Realized Beta GARCH

JEL Classification: C58, G11, G17

Suggested Citation

Groenborg, Niels and Lunde, Asger and Olesen, Kasper and Vander Elst, Harry, Realizing Correlations Across Asset Classes (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=3301322 or http://dx.doi.org/10.2139/ssrn.3301322

Niels Groenborg (Contact Author)

School of Economics and Business Economics, Aarhus University ( email )

Fuglesangs Allé 4
DK-8210 Aarhus V, 8210
Denmark

CREATES ( email )

School of Economics and Management
Fuglesangs Allé 4
DK-8210 Aarhus V
Denmark

Danish Finance Institute ( email )

Asger Lunde

Aarhus University - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kasper Olesen

CREATES ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

Bank of America - Bank of America Merrill Lynch ( email )

United States

Harry Vander Elst

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

19 Av Franklin Roosevelt
1050
Brussels
Belgium

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