Benefits and Consequences of Diversification: Evidence from Financialzed Commodity Portfolios

Rangga Handika () and Mahjus Ekananda ()

Asian Business Research Journal, 2019, vol. 4, 17-28

Abstract: The financial risk analysis of commodity markets has become an increasingly important issue in the recent decade. However, studies about commodities portfolio diversification benefits are limited. An analysis of commodities as a portfolio (rather than a single asset) should generate more interest from investors since the portfolio enhances single asset due to diversification benefit. This paper investigates the diversification benefits and consequences of portfolio in financialized commodity markets. Using eight financialized commodities at different data frequencies (daily, weekly and monthly) to construct seven equally weighted portfolios, we calculate portfolios value-at-risk (VaR) and expected shortfall (ES). Then, we perform back testing at 99 percent, 95 percent and 90 percent VaR levels. We find that on average commodities portfolios tend to have less accurate VaR and higher number of returns that are lower than ES. We conclude that even though portfolios have diversification benefits such as reducing risk and capital requirements, there are also unintended consequences.

Keywords: Commodity markets; Portfolio; Diversification; Value-at-risk; Expected shortfall; Back-testing. (search for similar items in EconPapers)
Date: 2019
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