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Realizing Correlations Across Asset Classes

Niels S. Grønborg (), Asger Lunde (), Kasper V. Olesen and Harry Vander Elst
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Niels S. Grønborg: Aarhus University, CREATES, and The Danish Finance Institute, Postal: Aarhus University, Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Asger Lunde: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Kasper V. Olesen: Bank of America Merrill Lynch
Harry Vander Elst: Coller Capital & ECARES

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We introduce a simple and intuitive approach of modeling and forecasting correlations for use in portfolio optimization. The model is composite in nature and consists of elements based on a bivariate realized volatility model. Importantly, our framework allows for volatility spill-overs between assets which provide an edge compared to competing models when forming portfolios. We apply the model to high-frequency data for commodity markets and demonstrate significant economic gains for an investor basing portfolio decisions on our modeling framework. This gain is significant in economic terms, even after imposing 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: 2018-12-17
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