Are benefits from oil-stocks diversification gone? New evidence from a dynamic copula and high frequency data

Krenar Avdulaj and Jozef Baruník

No 32, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Abstract: Oil is perceived as a good diversification tool for stock markets. To fully understand this potential, we propose a new empirical methodology that combines generalized autoregressive score copula functions with high frequency data and allows us to capture and forecast the conditional time-varying joint distribution of the oil-stocks pair accurately. Our realized GARCH with time-varying copula yields statistically better forecasts of the dependence and quantiles of the distribution relative to competing models. Employing a recently proposed conditional diversification benefits measure that considers higher-order moments and nonlinear dependence from tail events, we document decreasing benefits from diversification over the past ten years. The diversification benefits implied by our empirical model are, moreover, strongly varied over time. These findings have important implications for asset allocation, as the benefits of including oil in stock portfolios may not be as large as perceived.

Keywords: portfolio diversification; dynamic correlations; high frequency data time-varying copulas; commodities (search for similar items in EconPapers)
JEL-codes: C14 C32 C51 F37 G11 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ene and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Related works:
Journal Article: Are benefits from oil–stocks diversification gone? New evidence from a dynamic copula and high frequency data (2015)
Working Paper: Are benefits from oil - stocks diversification gone? New evidence from a dynamic copula and high frequency data (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fmpwps:32

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