Diamonds and precious metals for reduction of portfolio tail risk

Massimiliano Barbi, Hélyette Geman and Silvia Romagnoli

Applied Economics, 2020, vol. 52, issue 26, 2841-2861

Abstract: We study the performance of diamonds compared to gold and other precious metals in mitigating the tail risk of a diversified equity market portfolio over the period June 2007 to October 2018. Our results display a diversification benefit of some diamond indices, which also improve the portfolio reward-to-risk ratio. To corroborate this evidence, we study the dependence structure and tail dependence of diamonds and a broad equity market portfolio and compare it to the dependence obtained with gold and other precious metals. Results from fitting a bivariate copula show that the average left tail dependence reaches its minimum when diamonds are used. We also show that using shares of diamond-mining companies does not provide the same benefits.

Date: 2020
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DOI: 10.1080/00036846.2019.1696938

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