Institute of Information Theory and Automation

Publication details

Are benefits from oil-stocks diversification gone? New evidence from a dynamic copula and high frequency data

Journal Article

Avdulaj Krenar, Baruník Jozef


serial: Energy Economics vol.51, 1 (2015), p. 31-44

project(s): GA13-24313S, GA ČR, GA13-32263S, GA ČR

keywords: Portfolio diversification, Dynamic correlations, High frequency data, Time-varying copulas, Commodities

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abstract (eng):

Oil is perceived as a good diversification tool for stock markets. To fully understand this potential, we propose a new empirical methodology that combines generalized autoregressive score copula functions with high frequency data and allows us to capture and forecast the conditional time-varying joint distribution of the oil–stocks pair accurately. Our realized GARCH with time-varying copula yields statistically better forecasts of the dependence and quantiles of the distribution relative to competing models. Employing a recently proposed conditional diversification benefits measure that considers higher-order moments and nonlinear dependence from tail events, we document decreasing benefits from diversification over the past ten years. The diversification benefits implied by our empirical model are, moreover, strongly varied over time. These findings have important implications for asset allocation, as the benefits of including oil in stock portfolios may not be as large as perceived.

RIV: AH

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Last modification: 21.12.2012
Institute of Information Theory and Automation