The dynamic connectedness between collateralized loan obligations and major asset classes: a TVP-VAR approach and portfolio hedging strategies for investors

Spyros Papathanasiou, Dimitris Kenourgios, Drosos Koutsokostas () and Georgios Pergeris ()
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Drosos Koutsokostas: National and Kapodistrian University of Athens
Georgios Pergeris: National and Kapodistrian University of Athens

Empirical Economics, 2024, vol. 67, issue 3, No 7, 1063-1089

Abstract: Abstract Motivated by the increasing demand for alternative assets that can contribute to reducing portfolio risk, this paper examines the volatility spillovers between collateralized loan obligations (CLOs) and various in-demand investment instruments, including equities, bonds, crude oil, commodities, gold, bitcoin, shipping and real estate. The applied methodology comprehends the time-varying parameter vector autoregressive (TVP-VAR) modification of the classical spillover approach, for the period from January 1, 2012, to August 31, 2023. The empirical findings show moderate levels of dynamic connectedness; albeit several external shocks strengthened the interconnection among the assets. Moreover, we compare the ability of CLOs for hedging, during the overall sample period and multiple subperiods, by estimating hedge ratios and optimal portfolio weights, in order to inform investors about feasible portfolio adjustments. Our results indicate that CLOs constitute an effective hedging tool, irrespective of the period covered, as the short position in their volatility provides high hedging effectiveness for investors holding long positions in the volatility of all the remaining assets.

Keywords: Collateralized loan obligations; Bitcoin; Shipping; Real estate; Connectedness; Hedging ability (search for similar items in EconPapers)
JEL-codes: E31 G11 G12 G15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-024-02583-2

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