Title: An analysis of diversification benefits of commodity futures using Markov regime-switching approach

Authors: Ritika Jaiswal; Rashmi Uchil

Addresses: School of Management, National Institute of Technology Karnataka, Srinivasnagar PO, Surathkal, Mangalore-575025, India ' School of Management, National Institute of Technology Karnataka, Srinivasnagar PO, Surathkal, Mangalore-575025, India

Abstract: This study investigates the hedge and safe haven properties of individual commodity futures against stock market movements using a nonlinear regime-switching framework. Based on the results of Brock, Dechert and Scheinkman (BDS) test and information selection criterion, Markov-switching vector auto-regression (MS-VAR) model is applied with three regimes for gold and silver futures and with two regimes for crude oil, copper and zinc futures. The results demonstrate strong hedge and weak safe haven property of gold and silver futures, while it shows a weak hedge and weak safe haven potential of copper and zinc futures. Conversely, crude oil futures cannot be used as a safe haven against extreme stock market movements. In addition, portfolio analysis confirms that these findings provide significant information to investors for the construction of better risk-adjusted return portfolio.

Keywords: commodity futures; hedge; Markov-switching; Markov-switching vector auto-regression; MS-VAR; nonlinear; regime-switching; diversification; safe haven.

DOI: 10.1504/AAJFA.2018.089193

Afro-Asian Journal of Finance and Accounting, 2018 Vol.8 No.1, pp.20 - 47

Available online: 22 Dec 2017 *

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