Hedging Extreme Risk of Wheat in Semiparametric CVaR Portfolios with Commodities

Živkov, Dejan and Lončar, Sanja and Stankov, Biljana (2024) Hedging Extreme Risk of Wheat in Semiparametric CVaR Portfolios with Commodities. Finance a úvěr-Czech Journal of Economics and Finance, 74 (3). pp. 342-365. ISSN 0015-1920

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Abstract

This paper investigates how to minimize the downside risk of wheat by making three five-asset portfolios with different types of commodities – precious metals, industrial metals and energy. The portfolio optimization process uses the complex semiparametric CVaR metric as targeted. For comparison purposes, portfolios with the classical parametric CVaR are also constructed. Considering the different attitudes of investors towards risk, all portfolios are constructed assuming two different levels of risk aversion. The preliminary equicorrelation findings reveal that energy commodities have the lowest integration with the wheat market, which is suitable for diversification efforts. The constructed portfolios indicate that the precious metals portfolio has the lowest CVaR and mCVaR risk, taking into account both probability levels. Gold dominates this portfolio due to the lowest second, third and fourth moments. Industrial metals also have good hedging capabilities, while energy commodities perform the worst.

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