Regime Dependent Optimization across Various Risk Measures for Asia-Pacific Markets for a Diversifying Portfolios

Posted: 31 Jul 2020

See all articles by Saurav Kumar

Saurav Kumar

Indian Institute of Technology Kharagpur

Sujoy Bhattacharya

Independent

Date Written: June 10, 2020

Abstract

The aim of this paper is to examine the diversification capability of energy commodities in a portfolio comprising the stock market index, crude oil and natural gas in the Asia-Pacific region. In a first step, we identify the impact of market disturbances on the selected sample period on the causal linkage between commodity and stock markets. In the second step, we identify regime-specific multivariate copulas which are come into because of time-varying dependence shape and included various risk measures such as variance, Value at Risk(VaR) and tail risk. Finally, these risk measures are minimized with and without constraint set on established expected return of an established portfolio. We find shape changes with various regime in the joint behaviour of energy commodities and stock market index over time.

Thus the paper incorporates regime linked variance and therefore improve the portfolio of energy commodities and stock index against selected risk measure. We also find evidence that restricting short-selling of the stock index by assign positive weight on the stock index alleviate return from the portfolio over assign regimes. Finally, the tail risk optimal portfolio provides the best risk-return trade-off (i.e lowest risk and highest return) with a constraint set on the expected return and also without constraint set on the expected return. Although tail risk optimal portfolio provides best risk-return trade-off, one can use other optimal portfolios such as VaR optimal portfolios and variance optimal portfolios in those cases where we do not have the constraint on a return.

Keywords: Energy commodity, Stock market, Copula, Tail risk, Portfolio optimization

JEL Classification: G11, C58, C61

Suggested Citation

Kumar, Sauav and Bhattacharya, Sujoy, Regime Dependent Optimization across Various Risk Measures for Asia-Pacific Markets for a Diversifying Portfolios (June 10, 2020). Available at SSRN: https://ssrn.com/abstract=3643661

Sauav Kumar (Contact Author)

Indian Institute of Technology Kharagpur ( email )

KHARAGPUR, WEST BENGAL, INDIA
KHARAGPUR
India

Sujoy Bhattacharya

Independent ( email )

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