Realizing Correlations Across Asset Classes

Niels Strange Grønborg, Asger Lunde, Kasper Vinther Olesen, Harry Vander Elst

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Abstract

We introduce a simple and intuitive composite model for forecasting correlations for use in portfolio optimization. Each element of the composite model is based on a realized volatility model. To test our model, we consider an investor seeking to diversify an equity portfolio by including commodities. In a high-frequency setting, we demonstrate that significant economic gains can be achieved by basing portfolio decisions on our modeling framework. The gains depend on the quality of the chosen volatility model, and for our preferred model, they are economically significant despite the realistic constraints on short selling and portfolio turnover.

Original languageEnglish
Article number100729
JournalJournal of Financial Markets
Volume59
IssuePart A
Number of pages16
ISSN1386-4181
DOIs
Publication statusPublished - Jun 2022

Keywords

  • Commodities
  • Futures markets
  • Portfolio selection
  • Realized beta GARCH

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