Hedging Extreme Risk of Wheat in Semiparametric CVaR Portfolios with Commodities

Dejan Zivkov, Sanja Loncar and Biljana Stankov
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Dejan Zivkov: Novi Sad school of business, University of Novi Sad, Serbia
Sanja Loncar: Novi Sad school of business, University of Novi Sad, Serbia
Biljana Stankov: Novi Sad school of business, University of Novi Sad, Serbia

Czech Journal of Economics and Finance (Finance a uver), 2024, vol. 74, issue 3, 342-365

Abstract: This paper investigates how to minimize the downside risk of wheat by making three five-asset portfolios with different types of commodities – precious metals, industrial metals and energy. The portfolio optimization process uses the complex semiparametric CVaR metric as targeted. For comparison purposes, portfolios with the classical parametric CVaR are also constructed. Considering the different attitudes of investors towards risk, all portfolios are constructed assuming two different levels of risk aversion. The preliminary equicorrelation findings reveal that energy commodities have the lowest integration with the wheat market, which is suitable for diversification efforts. The constructed portfolios indicate that the precious metals portfolio has the lowest CVaR and mCVaR risk, taking into account both probability levels. Gold dominates this portfolio due to the lowest second, third and fourth moments. Industrial metals also have good hedging capabilities, while energy commodities perform the worst.

Keywords: semiparametric CVaR portfolio optimization; downside risks; DECO-GARCH model (search for similar items in EconPapers)
JEL-codes: C14 G11 Q02 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:74:y:2024:i:3:p:342-365

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