Abstract:
This paper models time-varying asymmetric tail dependences among the stock markets, bond markets, and commodity futures markets by a dynamic Skewed-t copula approach. Copula correlations and tail correlations are both higher within the same classes of assets than across ones. Portfolios including commodities diversify part of the tail risk in the benchmark portfolio and generate diversification benefits. Agriculture index occupies relatively heavier weights than other commodity futures indices in minimized tail risk portfolios. Our results imply that opening market access to commodity futures markets for financial institutions can benefit not only financial institutions from decreased tail risk in portfolio, but also hedgers from improved mechanism of risk sharing in commodity futures markets.
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