Realizing correlations across asset classes

Niels S. Grønborg, Asger Lunde, Kasper V. Olesen and Harry Vander Elst

Journal of Financial Markets, 2022, vol. 59, issue PA

Abstract: We introduce a simple and intuitive composite model for forecasting correlations for use in portfolio optimization. Each element of the composite model is based on a realized volatility model. To test our model, we consider an investor seeking to diversify an equity portfolio by including commodities. In a high-frequency setting, we demonstrate that significant economic gains can be achieved by basing portfolio decisions on our modeling framework. The gains depend on the quality of the chosen volatility model, and for our preferred model, they are economically significant despite the realistic constraints on short selling and portfolio turnover.

Keywords: Commodities; Futures markets; Portfolio selection; Realized beta GARCH (search for similar items in EconPapers)
JEL-codes: C58 G11 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:59:y:2022:i:pa:s1386418122000222

DOI: 10.1016/j.finmar.2022.100729

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