Commodity Markets through the business cycle

Mathieu Gatumel and Florian Ielpo
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Mathieu Gatumel: IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We introduce a new meaure of risk appetite in financial markets, based on the cross sectional behavior of excess returns. Turning them into probabilities through a Markov Switching model, we define one global risk appetite measure as the cross-sectional average of the individual probabilities for each asset to be in a " risk appetite " regime. Given the probabilistic approach that comes naturally with this Markov Switching framework, we present various tests to gauge the interest of the risk appetite measure that is presented here. Using these tests we show that our index behaves well vs. various competitors, especially in out-of-sample results. We test for the information content of various assets and find that a core of asset allocation-related assets provide the best possible choice over various competing specifications.

Keywords: Financial Crisis Pre-diction; Markov Switching; Risk Appetite; Cross Market Linkages (search for similar items in EconPapers)
Date: 2014
Note: View the original document on HAL open archive server: https://hal.science/hal-01302479v1
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Citations: View citations in EconPapers (8)

Published in Quantitative Finance, 2014, 14 (9), pp.1597-1618. ⟨10.2139/ssrn.2334180⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01302479

DOI: 10.2139/ssrn.2334180

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