Diamonds and Precious Metals for Reduction of Portfolio Tail Risk
Applied Economics, Forthcoming
Posted: 5 Dec 2019
Date Written: November 19, 2019
We study the performance of diamonds compared to gold and other precious metals in mitigating the tail risk of a diversified equity market portfolio over the period June 2007 to October 2018. Our results display a diversification benefit of some diamond indices, which also improve the portfolio reward-to-risk ratio. To corroborate this evidence, we study the dependence structure and tail dependence of diamonds and a broad equity market portfolio and compare it to the dependence obtained with gold and other precious metals. Results from fitting a bivariate copula show that the average left tail dependence reaches its minimum when diamonds are used. We also show that using shares of diamond-mining companies does not provide the same benefits.
Keywords: Diamonds, Precious metals, Diversification, Copula functions, Tail dependence
JEL Classification: G10, G11
Suggested Citation: Suggested Citation