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1
Gualter, Couto, Pimentel Pedro, and Faria Ricardo. "CORRELATION OF THE PORTUGUESE STOCK MARKET WITH MAJOR GLOBAL CAPITAL MARKETS." International Journal of Research - Granthaalayah 5, no. 7 (2017): 92–109. https://doi.org/10.5281/zenodo.834578.
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In this paper, we will analyse the increase of correlations in the market during periods of crisis, given its importance to the management and optimization of the portfolio, and especially for risk diversification in portfolio management. An evaluation of the level of correlation between the stock markets is important for several reasons. First, it enables to evaluate changes in the patterns of correlation, and thus to make the proper adjustments in portfolios’ investment. Second, policy makers are also interested in these correlations because of its implications for the stability of the financial system. The correlation coefficients are biased measures of dependence when markets become more volatile. This paper explores the correlation of the Portuguese capital markets with the Asian, American, European and Latin American Spanish stock markets. To this end, we used the PSI-20 index, Nikkei 225, NASDAQ, S&P 500, Euronext 100 and Ibex-35. Our analysis results show that the correlation does exist as a phenomenon during financial crises (Bear Market), reducing the benefits of portfolio diversification when most needed. Moreover, we believe that correlations have increased between the markets in recent years.
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Mats, Vladyslav. "Hedge performance of different asset classes in varying economic conditions." Radioelectronic and Computer Systems 2024, no. 1 (2024): 217–34. http://dx.doi.org/10.32620/reks.2024.1.17.
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In the realm of long-term investment, strategic portfolio allocation is an essential tool, especially in relation to risk management and return optimisation. There are many ways to pursue optimal portfolio composition, and their effectiveness depends on many factors, including the investor’s goals, risk appetite, and investment horizon. One of the primary means of portfolio optimisation is diversification. The core idea of diversification is to maintain a diverse portfolio with weakly correlated assets that can vastly reduce portfolio exposure to different market stress factors. Diversification is a fundamental strategy in investment and portfolio management that is essential for mitigating risk and enhancing potential returns over the long term. By spreading investments across various asset classes, sectors, geographies, and investment styles, diversification helps reduce the volatility of the overall portfolio. The main subject of this study is the theoretical basis of portfolio diversification and the analysis of historical data to derive optimal strategies for using uncorrelated assets to improve portfolio performance. This paper examines the correlation dynamics between different asset classes, such as stocks, bonds, and alternative investments, and their response to changes in inflation, interest rates, and market volatility, and tests it with historical data to deduce the optimal strategies for using uncorrelated assets to improve portfolio performance. The findings of this study prove the variable relationship between asset classes under specific economic conditions. This study uses historical data to show how different asset classes can be optimally leveraged or adjusted to mitigate risks and capitalise on opportunities presented by shifting economic indicators. This reveals that the hedging benefits of equities, bonds, and gold depend greatly on interest rates, market volatility, and inflation. It also provides guidelines for investors on optimal portfolio allocation and risk management. In conclusion, dynamic portfolio management is an essential tool for reducing the portfolio’s overall volatility while maximising returns. The diversification performance of different financial asset classes depends on major economic indicators such as inflation, interest rates, and market volatility. Investors seeking to optimise their portfolios in anticipation of or in response to economic changes, aiming to maximise returns while controlling for risk, can leverage these results.
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Narayan, Seema. "The Influence of Domestic and Foreign Shocks on Portfolio Diversification Gains and the Associated Risks." Journal of Risk and Financial Management 12, no. 4 (2019): 160. http://dx.doi.org/10.3390/jrfm12040160.
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This paper evaluates the influence of foreign or domestic stock market return and return of volatility shocks on dynamic conditional correlations (DCCs) between international stock markets and correlation volatility, respectively. The correlations between markets have implications for the gains from portfolio diversification, while correlation volatilities can be seen as risks to portfolio diversification. Meanwhile, domestic shocks are sourced from the return and return volatility from 24 developed, emerging, and frontier stock markets. The US stock market is the source of foreign shocks. The domestic and foreign shocks are derived using market-based returns and under bearish market conditions. We estimate multivariate exponential generalized autoregressive conditional heteroskedasticity (E-GARCH) models using daily and monthly MSCI based stock price data of selected developed, emerging, and frontier markets over 1993:1–2014:1. Our key results are as follows. Domestic market shocks were significant drivers of gains from portfolio diversification most of the time, although the US market effects were relatively stronger. On the other hand, the US, in terms of the number of significant cases as well as the size effects of shocks, dominated as a determinant of correlation volatility (or risks to portfolio diversification). Further, under bear market conditions, adjustments in correlations and correlation volatilities are found to be mostly US-induced. Bearish shocks, rather than market return based shocks, show strong evidence of the leverage effect. Signs of persistence of shocks are mainly noticed under bearish conditions.
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Suryawati, Baiq Nurul, Laila Wardani, Muttaqillah Muttaqillah, and Iwan Kusmayadi. "OPTIMIZING PORTFOLIO RETURN WITH NAÏVE DIVERSIFICATION-BASED MODELLING." JMM UNRAM - MASTER OF MANAGEMENT JOURNAL 10, no. 1 (2021): 15. http://dx.doi.org/10.29303/jmm.v10i1.646.
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This study aims at applying naïve diversification-based modeling in formation of optimal portfolios and to test the superiority of these portfolios against its sectoral indexes. The population of this study are all companies listed on the Indonesia Stock Exchange which are grouped into 10 sectors, namely: Agriculture; Basic Industry; Consumer; Finance; Infrastructure; Manufacture; Mining; Miscelanous Industry; Property; and Trade. The sample of this company is Top 10 Constituents in each company sector listed in the fact sheet per sector, published by the Indonesia Stock Exchange. The analytical tools used were paired sample statistics, paired sample correlations and significance tests. The results shows that portfolio formed with naïve diversification modeling shows its superiority compared to its sectoral portfolio. The correlation test shows moderate significance relationship between returns and standard deviation of sectoral portfolios with naïve diversification-based portfolios, while beta shows no meaningful relationship between sectoral portfolios and portfolios with naïve diversification modeling. Discrimination tests show the significance of returns and standard deviations between sectoral and naïve diversification modeling-based portfolios. While in line with the correlation test, there is no significant difference between the beta of the two portfolios, so it appears that the volatility of the two portfolios cannot be separated from overall market movement. For bearish market conditions, the level of portfolio loss using naïve diversification modeling is lower than sector-based portfolios in the Indonesia Stock Exchange.Keywords:investment, sector indexes, simplified, portfolio modelling
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Korzhnev, S. V. "Volatility-based adjustments to portfolio risk assessment tools." Vestnik Universiteta 1, no. 12 (2023): 154–61. http://dx.doi.org/10.26425/1816-4277-2022-12-154-161.
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The article is devoted to the analysis of correlation between assets in the Russian stock market. The purpose of the study is to assess the stability of correlation coefficients. The results of the Jennrich test and correlation analysis carried out indicate that correlation coefficients differ significantly for different volatility levels, that is, the coefficients in times of high volatility are significantly higher than those in times of low volatility. Correlations during periods of heightened volatility are key for assessing risks, since it is such volatility that characterizes negative market movements. The use of conventional correlation coefficients leads to an overestimation of the role of diversification in reducing the volatility in a portfolio of Russian assets and thus an underestimation of the investment portfolio risks. Risks can be assessed more accurately if correlation coefficients corresponding to periods of high volatility are used.
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Sandeep, Yadav. "Risk-Return Diversification Advantages of a Mixed Cryptocurrency Market Portfolio." International Journal of Innovative Research in Engineering & Multidisciplinary Physical Sciences 6, no. 3 (2018): 1–5. https://doi.org/10.5281/zenodo.14059447.
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Cryptocurrencies, despite their strong returns and low correlation with traditional assets, remain underutilized in investment portfolios due to two major concerns: high return volatility and uncertainty regarding the long-term viability of individual cryptocurrencies. In this paper, we propose a comprehensive analysis of the diversification effects offered by a mixed cryptocurrency portfolio, with particular focus on Bitcoin. By constructing and analyzing multiple portfolio configurations, we assess the differences in risk-return profiles when various cryptocurrencies are combined. Our findings indicate that diversified portfolios comprising a basket of cryptocurrencies can mitigate volatility and improve the overall risk-adjusted returns, potentially making cryptocurrencies a more appealing addition to investment portfolios. The paper is organized into the following sections: 1) Introduction, 2) Literature Review, 3) Proposed Methodology 4) Evaluation & 5) Conclusion.
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Saadah, Siti. "Volatility Spillover In Stock And Commodity Futures Market: Empirical Analysis In Indonesia’s Financial Market." Jurnal Manajemen 22, no. 2 (2018): 263. http://dx.doi.org/10.24912/jm.v22i2.363.
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Volatility spillover between stock markets causes insignificancy of diversification. Therefore, other investment alternatives is required to build an optimal portfolio, one of them being commodity futures. The low correlation between commodity futures and stocks indicates the advantage of diversification in investment portfolio containing both assets. In order to prove the advantage of diversification, author tested the existence of volatility spillover during September 16, 2010 - September 30, 2015. Estimation result using GARCH method indicates the presence of significant volatility spillover from stock exchange to commodity futures exchange. An important implication of this finding is that if the sectoral stock index and commodity futures are incorporated into an investment portfolio, the investor will not have optimal diversification advantage. This is because there is a correlation between performance of both markets as a result of both markets having the same characteristics in response to the shock that is coming.
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SARAL, KUNIKA. "Analyzing the Relationship between Real Estate Investments and Portfolio Diversification." INTERANTIONAL JOURNAL OF SCIENTIFIC RESEARCH IN ENGINEERING AND MANAGEMENT 08, no. 05 (2024): 1–5. http://dx.doi.org/10.55041/ijsrem32966.
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Real estate has long been considered an attractive investment option for individuals and institutions seeking to build wealth and diversify their portfolios. Unlike traditional investment vehicles such as stocks and bonds, real estate offers unique characteristics that can potentially enhance returns and mitigate risk. This analysis aims to explore the role of real estate investments in portfolio diversification and assess their potential impact on overall portfolio performance. Portfolio diversification is a fundamental principle in investment management, as it helps to spread risk across different asset classes and mitigate the impact of market fluctuations on a portfolio's overall value. By including assets with low or negative correlations, investors can reduce the volatility of their portfolios and potentially achieve higher risk-adjusted returns. Real estate investments, including direct property ownership, real estate investment trusts (REITs), and other real estate-related securities, have traditionally exhibited low correlations with other asset classes, such as equities and bonds. This low correlation can be attributed to the unique characteristics of real estate, including its tangible nature, the presence of rental income streams, and the potential for capital appreciation. Furthermore, real estate investments can provide a hedge against inflation, as property values and rental rates tend to increase during periods of rising prices. This feature makes real estate an attractive diversification option, particularly for investors seeking to protect their portfolios from the eroding effects of inflation. This analysis will delve into the historical performance of real estate investments, examine their risk and return characteristics, and evaluate their potential contribution to portfolio diversification. By examining empirical data and leveraging portfolio optimization techniques, we aim to provide insights into the optimal allocation of real estate investments within a diversified portfolio.
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Zhao, Xueyao. "Correlation and Impact of Bitcoin with Other Cryptocurrency Portfolios." Advances in Economics, Management and Political Sciences 11, no. 1 (2023): 123–28. http://dx.doi.org/10.54254/2754-1169/11/20230524.
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Bitcoin is a peer-to-peer form of digital currency proposed in 2008. Unlike other currencies, Bitcoin does not rely on a specific institution to issue it, it is based on a specific algorithm that generates it through a large number of calculations. In some countries, government agencies, central banks and academia regard Bitcoin is a virtual currency rather than a currency. This is because of Bitcoins high volatility, which does not have the two basic functions of the unit of account and the store of value that are unique to the currency. In recent years, Bitcoin has seen increasing media coverage and other cryptocurrency portfolios, as well as the significant capital gains have been seen in the high volatility environment. In this paper, we shed light on the low correlation of Bitcoin with traditional investment assets, making Bitcoin a potentially high-quality source of portfolio diversification. The results of the finding suggest that Bitcoin investments offer significant diversification benefits and should be included in optimal portfolios. In addition to this, we find that hedging strategies involving gold, oil, stocks and Bitcoin significantly reduce portfolio risk.
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Kuzheliev, Mykhailo, Dmytro Zherlitsyn, Ihor Rekunenko, Alina Nechyporenko, and Sergii Stabias. "Expanding portfolio diversification through cluster analysis beyond traditional volatility." Investment Management and Financial Innovations 22, no. 1 (2025): 147–59. https://doi.org/10.21511/imfi.22(1).2025.12.
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The study reviews the application of machine learning tools in financial investment portfolio management, focusing on cluster analysis for asset allocation, diversification, and risk optimization. The paper aims to explore the use of clustering analysis to broaden the concept of portfolio diversification beyond traditional volatility metrics. An open dataset from Yahoo Finance includes a ten-year historical period (2014–2024) of 130 actively traded securities from international stock markets used. Dataset selection prioritizes top liquidity and trading activity. Python analytical tools were employed to clean, process, and analyze the data. The methodology combines classical Markowitz optimization with clustering analysis techniques, highlighting variance-return trade-offs. Various asset characteristics, including annualized return, standard deviation, Sharpe ratio, correlation with indices, skewness, and kurtosis, were incorporated into the clustering models to reveal hidden patterns and groupings among financial assets. Results show that while clustering enhances insights into asset diversity, classical approaches remain historically superior in optimizing risk-adjusted returns. This study concludes that clustering complements, rather than replaces, classical methods by broadening the understanding of diversification and addressing many diversity factors, such as metrics of the technical, graphical, and fundamental analysis. The paper also introduces the diversity rate based on clustering, which measures the variance balance by all features within and between clusters, providing a broader perspective on diversification beyond traditional metrics. Future research should investigate dynamic clustering techniques, integrate fundamental economic indicators, and develop adaptive models for effective portfolio management in evolving financial markets.
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Gökgöz, Halilibrahim, Arif Arifoğlu, and Tuğrul Kandemir. "Stochastic and Dynamic Interaction between Islamic Volatility Index and Volatility Indices." Turkish Journal of Islamic Economics 11, no. 2 (2024): 59–83. http://dx.doi.org/10.26414/a4106.
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Integration in financial markets offers opportunities for free flow of information and capital for international investments. However, this also poses challenges for maintaining effective international portfolio diversification due to heightened market correlations. This study aims to analyze the diversifying potential of Islamic financial assets and undertake a dynamic analysis of their correlation with volatility indices. In this context, the study explores the interaction between the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index (DJIDVI) and such volatility indices including the CBOE Volatility Index (VIX), CBOE Oil Volatility Index (OVX), CBOE Gold Volatility Index (GVZ), and Euro Currency Volatility Index (EVZ). The Dynamic Correlation-Multivariate Stochastic Volatility (DC-MSV) model is employed to assess of how volatility shocks in one asset influence the volatility of others. The findings reveal that DJIDVI demonstrates the highest volatility clustering among the considered series. Moreover, DJIDVI exhibits mutual interactions with VIX and EVZ, and shocks increasing DJIDVI volatility also contribute to heightened volatility in VIX and OVX. Notably, the correlation between DJIDVI and volatility indices is influenced by global events. The study emphasizes the enhanced predictability of DJIDVI and its negative correlation with other series establishing its potential as a diversifier. The findings of this study contribute to advancing the understanding of international portfolio diversification emphasizing the importance of incorporating Islamic financial assets.
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Yoon, Byung Jo. "A Study on Hedging Opportunities of Emerging Market ETFs using Minimum Variance Hedge Ratios and Optimal Portfolio Weights." Academic Society of Global Business Administration 21, no. 5 (2024): 83–99. http://dx.doi.org/10.38115/asgba.2024.21.5.83.
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This study investigated the minimum variance hedge ratio and the weight of the optimal portfolio using the conditional correlation estimated by the DCC-Copula GARCH model for emerging market ETFs traded in the US stock market. The results of empirical analysis during the sample period are as follows. First, When hedging with implied volatility ETF(VXEEM), the most expensive alternative and the emerging market ETF with high hedging efficiency is EWX.. Second, the portfolio weighting strategy is more efficient than the dynamic hedging strategy, and in most portfolios, if the weight of VXEEM is more than 90%, the diversification effect is high. These findings imply that VXEEM can be used to hedge emerging market ETFs exposed to volatility spreads, and suggest that it can be used as important information when analyzing the impact on portfolios on conditional correlations.
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Patel, Ritesh, Muhammad Zubair Chishti, and Sun-Yong Choi. "Connectedness Between Music Tokens and Major Asset Classes: Implications for Hedging and Investments Strategies." American Business Review 28, no. 1 (2025): 223–71. https://doi.org/10.37625/abr.28.1.223-271.
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This study examines the dynamic connectedness between four music tokens, that is, Audius, CEEK, ROCKI and Viberate and major asset classes, namely, equity, bond, crude oil, Gold, Bitcoin and USD. We used daily data from December 23, 2020, to August 30, 2024. We measure the connectedness using the quantile VAR method and the wavelet quantile correlation approach. The quantile VAR method reveals that assets play receiver and transmitter roles. However, the assets hold a weak relationship, indicating the opportunity for portfolio diversification. Further, the results of wavelet quantile correlation also discovered negative or no relationship among major assets, revealing the existence of the portfolio diversification opportunity. The economic, geopolitical, and other related factors partially drive the connectedness of the selected assets. We measured the portfolio performance using the minimum variance portfolio, minimum correlation portfolio, recently developed minimum connectedness portfolio, equally weighted portfolio and risk-parity portfolio techniques. The minimum variance portfolio has low Sharpe and also does not include any music token due to the risky nature of the music token. However, the minimum connectedness and minimum correlation portfolios consider the addition of music tokens to a significant level, which also improves portfolio diversification. Both equally weighted portfolios and risk-parity portfolios include the music token as an asset and also give a significant Sharpe ratio. Music token serves as a hedging tool for all major asset classes. The other assets also give the hedging benefit to music tokens. However, the inclusion of the music token in the portfolio results in an increase in volatility of major asset classes, indicating a limited degree of advantage of the music token. Our study provides important implications for investors, portfolio managers, policymakers and artists.
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Kurach, Radosław. "Stocks, Commodities and Business Cycle Fluctuations – Seeking the Diversification Benefits." Equilibrium 7, no. 4 (2012): 101–16. http://dx.doi.org/10.12775/equil.2012.029.
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In this study we empirically verify the diversification potential of different commodity sectors for equity portfolios. We also try to find the explanation of varying cross-sectoral diversification benefits by verifying the relationship between macroeconomic variables and commodity indices. We employ correlation analysis for our purposes. The obtained results indicate that Precious Metal and Livestock are valuable equity portfolio diversifiers, while Industrial Metals volatility has much in common with the fluctuations of broad stock market.
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Zagaglia, Paolo. "International diversification for portfolios of European fixed-income mutual funds." Managerial Finance 43, no. 2 (2017): 242–62. http://dx.doi.org/10.1108/mf-01-2015-0026.
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Purpose The purpose of this paper is to study the scope for country diversification in international portfolios of mutual funds for the “core” EMU countries. The author uses a sample of daily returns for country indices of French, German and Italian funds to investigate the quest for international diversification. The author focuses on fixed-income mutual funds during the period of the financial market turmoil since 2007. Design/methodology/approach The author compute optimal portfolio allocations from both unconstrained and constrained mean-variance frameworks that take as input the out-of-sample forecasts for the conditional mean, volatility and correlation of country-level indices for funds returns. The author also applies a portfolio allocation model based on utility maximization with learning about the time-varying conditional moments. The author compares the out-of-sample forecasting performance of 12 multivariate volatility models. Findings The author finds that there is a “core” EMU country also for the mutual fund industry: optimal portfolios allocate the largest portfolio weight to German funds, with Italian funds assigned a lower weight in comparison to French funds. This result is remarkably robust across competing forecasting models and optimal allocation strategies. It is also consistent with the findings from a utility-maximization model that incorporates learning about time-varying conditional moments. Originality/value This is the first study on optimal country-level diversification for a mutual fund investor focused on European countries in the fixed-income space for the turmoil period. The author uses a large array of econometric models that captures the salient features of a period characterized by large changes in volatility and correlation, and compare the performance of different optimal asset allocation models.
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Okechukwu, Goodwell. "Cryptocurrency and Its Role in Portfolio Diversification." International Journal of Finance 9, no. 4 (2024): 35–47. http://dx.doi.org/10.47941/ijf.2115.
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Purpose: This study sought to explore cryptocurrency and its role in portfolio diversification. Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library. Findings: The findings reveal that there exists a contextual and methodological gap relating to cryptocurrency and its role in portfolio diversification. Preliminary empirical review revealed that incorporating cryptocurrencies into investment portfolios offered promising diversification benefits due to their low correlation with traditional assets, despite their high volatility and regulatory uncertainties. It highlighted the significant risk management challenges posed by cryptocurrencies' extreme price fluctuations and the evolving regulatory landscape. The study emphasized the importance of careful, limited allocation to cryptocurrencies, robust risk management practices, and continuous market monitoring. Ultimately, it suggested that cryptocurrencies could enhance portfolio performance when strategically used alongside traditional diversification methods. Unique Contribution to Theory, Practice and Policy: The Modern Portfolio Theory, Efficient Market Hypothesis and Behavioural Finance Theory may be used to anchor future studies on portfolio diversification. The study recommended a cautious yet strategic inclusion of cryptocurrencies in investment portfolios to enhance diversification, emphasizing the importance of ongoing research, robust risk management, and proactive monitoring due to their high volatility and regulatory uncertainties. It called for clear and consistent regulatory frameworks to protect investors while fostering market growth, and highlighted the need for collaboration between academia, industry, and regulatory bodies to improve financial literacy and market stability. These recommendations aimed to contribute to theoretical, practical, and policy aspects of cryptocurrency investments.
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Shah, Dr Manita D., Diyaa D, and Mohammed Adnan. "Dynamic Linkages Between U.S and Indian Equity Markets: An Empirical Study." INTERANTIONAL JOURNAL OF SCIENTIFIC RESEARCH IN ENGINEERING AND MANAGEMENT 08, no. 11 (2024): 1–6. http://dx.doi.org/10.55041/ijsrem38500.
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In this study, we investigate the dynamic linkages between US and Indian equity markets by examining the daily Total Return Index values of NIFTY 50 and NASDAQ Composite over a decade ending October 2024. While the indices are not found to be cointegrated, suggesting potential long-term diversification benefits, they exhibit significant short-term correlations. Through various statistical analyses including regression, correlation, and variance tests, we find strong positive associations between the markets, with NASDAQ Composite movements explaining approximately 89% of variations in NIFTY 50 Total Return Index (TRI). The study reveals distinct volatility patterns, with the Indian market showing higher price fluctuations but stronger absolute growth compared to its US counterpart. Despite the strong correlation, both markets maintain unique characteristics influenced by their respective economic fundamentals. The findings demonstrate the evolving nature of market integration between developed and emerging economies, offering valuable insights for international portfolio diversification strategies and risk management in an increasingly interconnected global financial system. Keywords: Market Integration, Volatility Spillover, Portfolio Diversification, Stock Market Returns, Emerging Markets, Cross-market Correlation
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Gomes Borges, Wemerson, Luciano Ferreira Carvalho, Nilton Cesar Lima, and Donizete Reina. "VOLATILITY AND CONDITIONAL MARKET CORRELATIONS IN PERIODS OF CRISIS." Revista Eletrônica de Estratégia & Negócios 16 (February 28, 2024): e18340. http://dx.doi.org/10.59306/reen.v16e2023e18340.
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The study analyzed co-movements and contagions in Latin American stock markets, testing the benefits of diversification in times of crisis. The period investigated was from January 2000 to December 2018, testing the correlations through Asymmetric Dynamic Conditional Correlation models. The results indicate that correlations increase in periods of crisis in all markets and sectors, thus reducing the benefits of portfolio diversification. It was also possible to observe that the increase in correlations during an internal crisis is of smaller magnitude than the increase in correlations during external crises, such as Subprime.
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Neffelli, Marco. "Target Matrix Estimators in Risk-Based Portfolios." Risks 6, no. 4 (2018): 125. http://dx.doi.org/10.3390/risks6040125.
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Portfolio weights solely based on risk avoid estimation errors from the sample mean, but they are still affected from the misspecification in the sample covariance matrix. To solve this problem, we shrink the covariance matrix towards the Identity, the Variance Identity, the Single-index model, the Common Covariance, the Constant Correlation, and the Exponential Weighted Moving Average target matrices. Using an extensive Monte Carlo simulation, we offer a comparative study of these target estimators, testing their ability in reproducing the true portfolio weights. We control for the dataset dimensionality and the shrinkage intensity in the Minimum Variance (MV), Inverse Volatility (IV), Equal-Risk-Contribution (ERC), and Maximum Diversification (MD) portfolios. We find out that the Identity and Variance Identity have very good statistical properties, also being well conditioned in high-dimensional datasets. In addition, these two models are the best target towards which to shrink: they minimise the misspecification in risk-based portfolio weights, generating estimates very close to the population values. Overall, shrinking the sample covariance matrix helps to reduce weight misspecification, especially in the Minimum Variance and the Maximum Diversification portfolios. The Inverse Volatility and the Equal-Risk-Contribution portfolios are less sensitive to covariance misspecification and so benefit less from shrinkage.
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Danila, Nevi. "Spillover of volatility among financial instruments: ASEAN-5 and GCC market study." PLOS ONE 18, no. 10 (2023): e0292958. http://dx.doi.org/10.1371/journal.pone.0292958.
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The research examines a comovement and spillover of volatility among foreign exchange, conventional and shariah stock markets in Association of South East Asian Nation-5 (ASEAN) countries and Gulf Cooperation Council (GCC) countries. Generalized Autoregressive Conditional Heteroskedasticity—Baba, Engle, Kraft and Kroner (GARCH-BEKK) and Dynamic Conditional Correlation (GARCH-DCC) models are used to capture the correlation and transmission volatility of the markets. The overall results show that both the Shariah and the conventional stock indices respond similarly to each country’s currency. A bidirectional (two-way relationship) volatility spillover exists only in Malaysia and a unidirectional (one-way relationship) volatility is observed in Indonesia, Singapore, Thailand, and Bahrain. The rest of the markets–the Philippines, Saudi Arabia, and the United Arab Emirates (UAE)–do not have any volatility spillover evidence. Based on DCC outcomes, the conventional and Shariah stock in ASEAN-5 countries and GCC countries reveal the market efficiency, i.e., a positive high conditional correlation. Only Bahrain shows less efficiency than the other countries. It implies no portfolio diversification advantage in conventional and Shariah stock indices. Contrarily, currency and stock (conventional and Shariah) markets provide portfolio diversification benefits for all ASEAN-5 and GCC countries.
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Foglia, Matteo, and Eliana Angelini. "Volatility Connectedness between Clean Energy Firms and Crude Oil in the COVID-19 Era." Sustainability 12, no. 23 (2020): 9863. http://dx.doi.org/10.3390/su12239863.
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The work investigates the volatility connectedness between oil price and clean energy firms over the period 2011–2020 (including the COVID-19 outbreak). Using the volatility spillover models, and dynamic conditional correlation, we are able to identify the volatility spillover effect between these financial markets and its implications for portfolio diversification. The results indicate a significant change in both static and dynamic volatility connectedness around the COVID-19 outbreak. For instance, total connectedness index changes from 21.36% (pre-COVID-19) to 61.23% (COVID-19). This finding shows the strong effect of the COVID-19 pandemic on these financial markets. Furthermore, we show how the WTI oil from the volatility transmitter (before the outbreak of the pandemic) becomes a risk receiver after the start of the global pandemic COVID-19. Our findings indicate that recent pandemic intensified volatility spillovers, supporting the financial contagion effects. Finally, we determine the optimal hedge ratios and portfolio weights. The estimates provided suggest the need for active portfolio management, taking into account the distinct characteristics of each sector and thus, the firm. For example, the optimal weight analysis shows how the clean sector has become important in optimal diversification strategies. Our results can be used for portfolio decisions and regulatory policymaking, particularly in the current context of high uncertainty.
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Aliu, Florin, Besnik Krasniqi, Adriana Knapkova, and Fisnik Aliu. "Interdependence and Risk Comparison of Slovak, Hungarian and Polish Stock Markets: Policy and Managerial Implications." Acta Oeconomica 69, no. 2 (2019): 273–87. http://dx.doi.org/10.1556/032.2019.69.2.6.
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Risk captured through the volatility of stock markets stands as the essential concern for financial investors. The financial crisis of 2008 demonstrated that stock markets are highly integrated. Slovakia, Hungary and Poland went through identical centralist economic arrangement, but nowadays operate under diverse stock markets, monetary system and tax structure. The study aims to measure the risk level of the Slovak Stock Market (SAX index), Budapest Stock Exchange (BUX index) and Poland Stock Market (WIG20 index) based on the portfolio diversification model. Results of the study provide information on the diversification benefits generated when SAX, BUX and WIG20 join their stock markets. The study considers that each stock index represents an independent portfolio. Portfolios are built to stand on the available companies that are listed on each stock index from 2007 till 2017. The results of the study show that BUX generates the lowest risk and highest weighted average return. In contrast, SAX is the riskiest portfolio but generates the lowest weighted average return. The results find that the stock prices of BUX have larger positive correlation than the stock prices of SAX. Moreover, the highest diversification benefits are realized when Portfolio SAX joins Portfolio BUX and the lowest diversification benefits are achieved when SAX joins WIG20.
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Alihodžić, Almir. "The volatility of bitcoin and the riskiness of the financial portfolio." Bankarstvo 52, no. 2-3 (2023): 128–65. http://dx.doi.org/10.5937/bankarstvo2303128a.
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The main goal of this research is to evaluate the returns and risks of the following types of assets: Bitcoin, EUR Stoxx 50, gold, bonds: government bonds ICE Bof A 1-10 Year excluding Italy and Greece and the corporate bond index ICEB of A 1-10 Year AA. The paper tested a total of ten portfolios according to different scenarios for digital and financial assets. Also, in the paper, greater measures of risk and return were calculated with the aim of forming an optimal portfolio with minimal risk. The results of this research revealed that the correlation between Bitcoin and other forms of financial assets is generally low and negative, which can be a good instrument for portfolio diversification, and positively affect portfolio performance. Also, the results of this study showed that in terms of volatility and return measure of a total of ten portfolios, the second portfolio (whose structure consists of Bitcoin, Euro Stoxx 50, gold, government bonds ICE Bof A 1-10 Year - excluding Italy and Greece and the corporate index bond ICEBof A 1-10 Year AA) is the most optimal portfolio. The findings of this research can serve in risk and loss assessments of portfolio managers, investors, and regulators.
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Özdurak, Caner, and Derya Hekim. "Beyond the Silicon Valley of the East: Exploring Portfolio Diversification with India and MINT Economies." Journal of Risk and Financial Management 17, no. 7 (2024): 269. http://dx.doi.org/10.3390/jrfm17070269.
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In the past few decades, India’s tech industry has boomed, making it a leader in the digital world. Today, India has many big tech companies, well-trained software developers, and cutting-edge technology like AI and cloud computing. This success shows India’s innovative spirit and makes the country a good example for other developing nations. However, global portfolio managers often overlook potential diversification opportunities beyond India’s dynamic stock market. This study investigates the viability of MINT (Mexico, Indonesia, Nigeria, and Turkey) as diversification targets, specifically analyzing spillover effects and volatility dynamics between their stock markets and that of India. Leveraging vector autoregressions (VARs) and dynamic conditional correlation (DCC)–GARCH models, we uncover intricate relationships. Further, DCC–GARCH analysis reveals varying degrees of volatility spillover, offering valuable insights for risk management. Our findings suggest that MINT economies, particularly Mexico and Turkey, hold promise for Indian portfolio diversification. By strategically incorporating these markets, investors can potentially mitigate India-specific risks and enhance portfolio returns. We urge global portfolio managers to consider Turkey as a viable diversification avenue, acknowledging the nuanced market growth dynamics highlighted in this study.
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Sahabuddin, Mohammad, Md Aminul Islam, Mosab I. Tabash, Md Kausar Alam, Linda Nalini Daniel, and Imad Ibraheem Mostafa. "Dynamic Conditional Correlation and Volatility Spillover between Conventional and Islamic Stock Markets: Evidence from Developed and Emerging Countries." Journal of Risk and Financial Management 16, no. 2 (2023): 111. http://dx.doi.org/10.3390/jrfm16020111.
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This study aims to investigate the dynamic conditional correlation and volatility spillover between the conventional and Islamic stock markets in developed and emerging countries in order to develop better portfolio and asset allocation strategies. We used both multivariate GARCH (MGARCH) and multi-scales-based maximal overlap discrete wavelet transform (MODWT) approaches to investigate dynamic conditional correlation and volatility spillover between conventional and Islamic stock markets in developed and emerging countries. The results show that conventional and Islamic markets move together in the long run for a specific time horizon and present time-varying volatility and dynamic conditional correlation, while volatility movement changes due to financial catastrophes and market conditions. Further, the findings point out that Chinese conventional and Islamic stock indexes showed higher volatility, whereas Malaysian conventional and Islamic stock indexes showed comparatively lower volatility during the global financial crisis. This study provides fresh insights and practical implications for risk management, asset allocation, and portfolio diversification strategies that evaluate stock market reactions to the crisis in the international avenues of finance literature.
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Acikgoz, Turker, Soner Gokten, and Abdullah Bugra Soylu. "Multifractal Detrended Cross-Correlations Between Green Bonds and Commodity Markets: An Exploration of the Complex Connections between Green Finance and Commodities from the Econophysics Perspective." Fractal and Fractional 8, no. 2 (2024): 117. http://dx.doi.org/10.3390/fractalfract8020117.
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Green bonds represent a compelling financial innovation that presents a financial perspective solution to address climate change and promote sustainable development. On the other hand, the recent process of financialisation of commodities disrupts the dynamics of the commodity market, increasing its correlation with financial markets and raising the risks associated with commodities. In this context, understanding the dynamics of the interconnectivity between green bonds and commodity markets is crucial for risk management and portfolio diversification. This study aims to reveal the multifractal cross-correlations between green bonds and commodities by employing methods from statistical physics. We apply multifractal detrended cross-correlation analysis (MFDCCA) to both return and volatility series, demonstrating that green bonds and commodities exhibit multifractal characteristics. The analysis reveals long-range power-law cross-correlations between these two markets. Specifically, volatility cross-correlations persist across various fluctuations, while return series display persistence in small fluctuations and antipersistence in large fluctuations. These findings carry significant practical implications for hedging and risk diversification purposes.
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Moodley, Fabian, Sune Ferreira-Schenk, and Kago Matlhaku. "Time–Frequency Co-Movement of South African Asset Markets: Evidence from an MGARCH-ADCC Wavelet Analysis." Journal of Risk and Financial Management 17, no. 10 (2024): 471. http://dx.doi.org/10.3390/jrfm17100471.
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The growing prominence of generating a well-diversified portfolio by holding securities from multi-asset markets has, over the years, drawn criticism. Various financial market events have caused asset markets to co-move, especially in emerging markets, which reduces portfolio diversification and enhances return losses. Consequently, this study examines the time–frequency co-movement of multi-asset classes in South Africa by using the Multivariate Generalized Autoregressive Conditional Heteroscedastic–Asymmetrical Dynamic Conditional Correlation (MGARCH-DCC) model, Maximal Overlap Discrete Wavelet Transformation (MODWT), and the Continuous Wavelet Transform (WTC) for the period 2007 to 2024. The findings demonstrate that the equity–bond, equity–property, equity–gold, bond–property, bond–gold, and property–gold markets depict asymmetrical time-varying correlations. Moreover, correlation in these asset pairs varies at investment periods (short-term, medium-term, and long-term), with historical events such as the 2007/2008 Global Financial Crisis (GFC) and the COVID-19 pandemic causing these asset pairs to co-move at different investment periods, which reduces diversification properties. The findings suggest that South African multi-asset markets co-move, affecting the diversification properties of holding multi-asset classes in a portfolio at different investment periods. Consequently, investors should consider the holding periods of each asset market pair in a portfolio as they dictate the level of portfolio diversification. Investors should also remember that there are lead–lag relationships and risk transmission between asset market pairs, enhancing portfolio volatility. This study assists investors in making more informed investment decisions and identifying optimal entry or exit points within South African multi-asset markets.
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Ngene, Geoffrey, Jennifer Brodmann, and M. Kabir Hassan. "DYNAMIC VOLATILITY AND SHOCK INTERACTIONS BETWEEN OIL AND THE U.S. ECONOMIC SECTORS." Journal of Business Accounting and Finance Perspectives 1, no. 1 (2019): 1. http://dx.doi.org/10.26870/jbafp.2018.01.002.
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his study examines (i) the dynamic shocks and volatility interactions between each of the eleven U.S. economic sectors and the oil market; (ii) riskminimizing optimal capital allocations between each sector and oil; and (iii) the hedging effectiveness resulting from the inclusion of oil in each sector portfolio. Using weekly data spanning the period June 1994 through February 2016, we document the following regularities: (i) the conditional correlation between each sector and the oil market is time-varying and slowly decaying; (ii) there is either volatility or shock transmission from oil to each sector but not the reverse; and (iii) investors can minimize and hedge risk by allocating a portion of their wealth to oil commodities and forming a portfolio consisting of sector stocks and oil commodities. however, they will need to overweight their investment in sector stocks. Our findings indicate that oil commodities offer diversification potential to U.S. investors holding sector portfolios such as sector ETFs and mutual funds. Further, the risk parity portfolio weights significantly differ from the capital allocation weights.
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Rehman, Mobeen Ur, and Xuan Vinh Vo. "Integration and volatility spillover amongst banks: a cross-correlation analysis." Journal of Economic and Administrative Sciences 39, no. 1 (2021): 203–24. http://dx.doi.org/10.1108/jeas-07-2020-0136.
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PurposeThe rising interconnectedness between international banks, at one end, allow participants to share risk and diversification which leads to stable local lending and increase in competitiveness, however, at the other end poses potential for volatility spillover and thereby contagion phenomena. Therefore, investigating the presence of co-integration amongst international banks can provide useful information about risk spillover in times of financial turbulenceDesign/methodology/approachThe authors employ wavelet correlation and wavelet multiple cross-correlation strategies, following an initial decomposition of returns series through maximal overlap discrete wavelet transformation (MODWT).FindingsThe results indicate high integration level between Citibank and Deutsche Bank whereas potential of diversification exists between pairs of Citibank–Hong Kong and Shanghai Banking Corporation and Bank of America–Deutsche Bank, with former more evident in short- and medium-term relationship and later in long-run investment horizon. This paper carries implications for investors, fund managers and policymakers in foreseeing the prospects of contagion attributable to high level integration levels.Practical implicationsImplications for cross-border banking integration includes the presence of common lender effect which appears as a dominant factor for cross-border contagion. Therefore, banks based in different countries should focus more on funds diversification rather than borrowing much from any single creditor. Furthermore, foreign operations based on subsidiaries instead of relying on direct cross-border lending can help in reducing volatility of the foreign financial resources. Nevertheless, based on the results and significant strand of existing literature, the presence of contagion is inevitable, and therefore, a careful consideration of cross-border banking supervision and co-operation by the financial authorities can help in mitigating the volatility of global capital flows.Originality/valueFirst, this study fills gap in the existing literature regarding the discussion on portfolio diversification opportunities in the banking sector. The banking sector is usually perceived as a main source of fixed income securities or financing; however, on the contrary, investors may also be interested for investments in publicly listed bank's stock. Most of the work regarding portfolio diversification revolves around capital market instruments; however, publicly listed shares of largest bank also present an avenue for diversification. Second, major fundamentals and the associated factor for banks performance are reflected in the its profits, either these profits result from large customer base or proper allocation of bank's assets, etc. Therefore, returns of these banks serve as a barometer for their performance and co-movement between any two banks can highlight the presence and extent of their underlying association. Third, the authors apply the latest extensions in wavelet techniques after decomposing returns series through the MODWT framework. This decomposition followed by wavelet estimations allow us to investigate banks integration level across different time and frequency space thereby carrying implications for both short- and long-run investors. Fourth, by analysing the presence of returns co-movements, the authors can predict the extent of plausible contagion since the recent global financial crisis of 2008–2009 used banks as the main medium of propagation of shocks. Fifth, the work presents many implications for the investment community, major trading partners associated with banks through different instruments and for policymakers so that the effect of contagion can be anticipated or at least mitigated in case of future financial turbulence.HighlightsWe investigate portfolio diversification opportunities in the banking sector.Time-frequency returns co-movements is measures by applying wavelet multiple correlation and cross-correlation techniques on decomposed return series.Deutsche Bank and Bank of America act as highest transmitter and recipient of volatility, respectively using the spillover approach of Diebold and Yilmaz (2012).Citibank and Deutsche Bank exhibit high pairwise correlation indicating no diversification benefits.Citibank exhibits high level of integration with other banks in the short- and medium-run whereas Deutsche Bank exercises high integration levels in the long-run investment period.
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Jiang, Jiarui, Mengsui Sun, Mengyao Lin, and Mingfei Ouyang. "Innovation and Research of Sector-based VIX Derived from VIX." Advances in Economics, Management and Political Sciences 81, no. 1 (2024): 92–104. http://dx.doi.org/10.54254/2754-1169/81/20241413.
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VIX, also known as the Chicago Board Options Exchange Volatility Index, is designed to measure the markets expectation of 30-day volatility. People could use VIX for risk management, hedging, or portfolio diversification because it is seen as a signal of risk, uncertainty, and peoples fear in financial markets. However, considering previous studies have not focused on the sectorbased VIX, this paper aims to monitor the market risks better and assess market expectations, in terms of portfolio management or risk hedging, by creating sectorbased VIX. First, we figure out 11 sectors in the current market based on the Global Industry Classification Standard (GICS). Second, we select a few of the 11 sectors to compute the respective VIX for each sector over a fixed period. Third, we do the correlation between different sectors. Findings from the above calculations suggest that healthcare with utilities and consumer staples have a positive correlation, as well as consumer staples and utilities. In contrast, a negative correlation is observed between information technology and utilities and consumer staples; moreover, consumer discretionary exhibits a negative correlation with utilities. These results show potential diversification opportunities for investors to consider when managing investment. Besides, by exploring correlations across several sectors, this study provides investors with a unique perspective on the volatile market environment with greater flexibility.
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AMMANN, MANUEL, and MICHAEL VERHOFEN. "THE CONGLOMERATE DISCOUNT: A NEW EXPLANATION BASED ON CREDIT RISK." International Journal of Theoretical and Applied Finance 09, no. 08 (2006): 1201–14. http://dx.doi.org/10.1142/s0219024906004025.
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We present a simple new explanation for the diversification discount in the valuation of firms. We demonstrate that, ceteris paribus, limited liability of equity holders is sufficient to explain a diversification discount. To derive this result, we use a credit risk model based on the value of the firm's assets. We show that a conglomerate can be regarded as an option on a portfolio of assets. By splitting up the conglomerate, the investor receives a portfolio of options on assets. The conglomerate discount arises because the value of a portfolio of options is always equal to or higher than the value of an option on a portfolio. The magnitude of the conglomerate discount depends on the number of business units and their correlation, as well as their volatility, among other factors.
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Metadjer, Widad, Seyf Eddine Benbakhti, and Hadjer Boulila. "Diagnostic of Innovations and Volatility Persistence in Emerging Markets." International Journal of Islamic Business and Economics (IJIBEC) 4, no. 2 (2020): 95. http://dx.doi.org/10.28918/ijibec.v4i2.2355.
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This paper aims to analyse the shocks and volatility persistence of both Islamic and conventional financial market, and the nature of the correlation between the two markets. The study uses Bivariate BEKK-GARCH(1,1) model in the examination of the shocks and volatility based on the daily prices of Dubai Islamic Capital Market (Sukuk index) and conventional Stock Market (DFM index).As a result, it documents that both Sukuk and stock market indices are affected by their own news and shows volatility persistence over the study period. The study also finds a negative correlation between the Sukuk and Stock market prices during the Dubai debt crisis which indicates that Islamic bonds are good portfolio diversifier. Our study seeks to define the nature of the correlation between the Sukuk market and the stock market using daily prices, unlike other studies that use returns. In addition, our empirical results might be valuable for investors and market makers to ensure a good portfolio diversification strategy.
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Yadav, Miklesh Prasad, and Asheesh Pandey. "Volatility Spillover Between Indian and MINT Stock Exchanges: Portfolio Diversification Implication." Indian Economic Journal 67, no. 3-4 (2019): 299–311. http://dx.doi.org/10.1177/0019466220947501.
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We examine the spillover effect from the Indian stock market to Mexico, Indonesia, Nigeria and Turkey (MINT) stock markets in order to check if suitable diversification opportunities are available to global portfolio managers investing in India. We apply Granger causality test, vector auto-regression (VAR) and dynamic conditional correlation (DCC)–MGARCH to investigate the level of integration between India and MINT economies. We observe bidirectional causality between India and Nigeria, unidirectional causality in Mexico and Indonesia, while no causality is found between India and Turkey. Our VAR results suggest that none of the MINT economies impact the return of the Indian stock market; rather returns of the Indian stock market are more affected by their own lagged values. Finally, by applying DCC–MGARCH, we observe that there is no volatility spillover from India to any of the MINT economies. We recommend that portfolio managers investing in the Indian economy may explore MINT economies as possible destinations to diversify their risk. Our study has implications for both academia and portfolio managers.
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Belkhir, Nadia, Wafa Kammoun Masmoudi, Sahar Loukil, and Rihab Belguith. "Portfolio Diversification and Dynamic Interactions between Clean and Dirty Energy Assets." International Journal of Energy Economics and Policy 15, no. 1 (2024): 519–31. https://doi.org/10.32479/ijeep.17664.
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Clean energy, with its focus on environmental sustainability and efficiency, has gained significance as concerns over the impact of traditional energy growth. However, there is limited evidence on the value of clean energy investments. This paper explores the role of clean energy in a balanced investment portfolio by examining two traditional energy assets (crude oil and natural gas) and two clean energy assets (SPDR S&P Kensho Clean Power ETF and iShares Global Clean Energy ETF). Using a time-varying parameter vector autoregression (TVP-VAR) model on daily data from October 2021 to January 2024, we analyze the evolving connectedness between these assets. Our results highlight dynamic interactions, with green finance indices like CNRG acting as net shock transmitters, while traditional energy indices, such as WTI and gas, primarily receive shocks. The analysis suggests that green assets, particularly ICLN, enhance portfolio stability and hedging efficiency, especially in minimum correlation and risk parity portfolios. Fossil fuels, especially gas, exhibit higher volatility, requiring careful portfolio management. Ultimately, integrating ESG criteria and adapting investment strategies to market conditions may enhance responsible investing and long-term value creation.
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Meric, Ilhan, Joe Kim, Lewis Coopersmith, and Gulser Meric. "Co-Movements of Pacific-Basin Stock Markets: Portfolio Diversification Implications." Journal of International Business and Economy 8, no. 2 (2007): 11–34. http://dx.doi.org/10.51240/jibe.2007.2.2.
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This paper studies the co-movements of and the linkages between twelve Pacific-Basin stock markets during the June 1995-May 2005 period. We use the principal components analysis (PCA) technique to group the stock markets into statistically significant principal components in terms of the similarities of their index return movements. The rolling correlation analysis results show that correlation between the Pacific-Basin stock markets has considerable time-varying volatility. The Granger causality test results indicate that the weekly index returns of most Pacific-Basin stock markets are weak-form efficient and that most Pacific-Basin stock markets have significant lead/lag linkages. The study investigates the portfolio diversification implications of the linkages between the Pacific-Basin stock markets.
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Abdullah, Ahmad Monir, Maizatulakma Abdullah, Mohamat Sabri Hassan, and Hamdy Abdullah. "Evaluating diversification approaches: A comparative analysis of traditional, Islamic indices in the United Kingdom, and alternative investment options." Asian Economic and Financial Review 15, no. 1 (2024): 1–26. https://doi.org/10.55493/5002.v15i1.5257.
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This study explores the diversification potential of the United Kingdom’s (UK) conventional and Islamic stock indices, Bitcoin, gold, crude oil, and the GBP/USD exchange rate from 2011 to 2022 using methodologies such as VECM, MODWT, MGARCH-DCC, and CWT. The findings indicate that UK indices, gold, and Bitcoin respond to changes in crude oil prices and GBP/USD rates, whereas GBP/USD and crude oil show low correlation, offering diversification benefits. Gold consistently maintains a low correlation with UK indices during global disruptions, such as the 2020 pandemic and the 2022 Ukraine-Russia conflict, reinforcing its reliability as a diversification asset. However, Bitcoin shows potential as a diversification tool despite its high volatility, which is a concern. Crude oil’s effectiveness as a diversification asset diminishes for holding periods beyond 64 trading days. The study also reveals that the global financial crisis significantly impacted both UK Islamic and conventional indices, challenging the role of the Islamic index as a safe haven and suggesting that Shariah screening may not necessarily shield Islamic markets during economic downturns. These findings provide investors with essential insights into selecting equity indices and commodities for portfolio diversification and underscore the importance of advanced methodologies to understand correlation and volatility dynamics.
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Lovretin Golubić, Zrinka, Denis Dolinar, and Davor Zoričić. "A heuristic approach to the estimation of an efficient benchmark in the Croatian stock market." Ekonomski pregled 76, no. 1 (2025): 3–14. https://doi.org/10.32910/ep.76.1.1.
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In this paper a heuristic approach, which solely relies on risk parameter estimation, is pursued to estimate the efficient benchmark in the Croatian stock market. Optimisation method focused on risk parity is employed allowing investors to diversify risk by relying on equal risk contribu tion to achieve optimal portfolio diversification. Six different benchmarks related to risk parity method variations and covariance matrix estimations are examined in order to compare their performance with the capitalization-weighted counterpart. This allows insight regarding the po tential sources of differences in their risk-reward characteristics. Results in this study are based on 28 out-of-sample estimations in the period from April 2005 to March 2019. The findings do not show evidence of risk parity method being able to provide exposure to rewarded risk factors in the Croatian stock market. Moreover, regarding the diversification of unrewarded risks even the benchmark portfolio with the lowest reported volatility is more volatile than the CROBEX bench mark. However, if only expansion sub-period is analysed all examined benchmarks outperform the CROBEX benchmark with the factor risk parity portfolio based on two or more components reporting the lowest volatility. Overall the results show that risk parity portfolios do outperform the equally-weighted benchmark and that assuming equal correlations of portfolio constituents or applying statistical shrinkage method for their estimation yields better results than relying on the principal components analysis.
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Bharathi and Ramana Mayya Suresh. "Cryptocurrency as an Investment Avenue: Risk, Returns, and Regulatory Challenges." International Journal of Commerce and Management Research Studies (IJCMRS) 2, no. 1 (2025): 37–47. https://doi.org/10.5281/zenodo.15165691.
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This study examines cryptocurrency as an emerging investment asset class, analyzing its risk-return characteristics and regulatory environment. Using data from 2016 to 2024, we evaluate Bitcoin, Ethereum, and a diversified crypto portfolio against traditional asset classes. Our findings reveal that cryptocurrencies demonstrate significantly higher returns (mean annual return of 112.7% for Bitcoin) coupled with extreme volatility (annualized standard deviation of 78.4%). Correlation analysis shows that cryptocurrencies maintain low correlation with traditional assets (r = 0.21 with S&P 500), supporting their role in portfolio diversification despite high intra-class correlation. The research identifies four primary risk categories affecting crypto investments: technical vulnerabilities, market concentration, liquidity constraints, and regulatory uncertainty. Regulatory analysis across key jurisdictions reveals a fragmented landscape transitioning from ambiguity to structured oversight. We propose a regulatory equilibrium framework that balances investor protection with innovation and market efficiency. This study concludes that cryptocurrencies represent a high-risk, potentially high-reward component within diversified portfolios, with their optimal allocation heavily dependent on investor risk tolerance and regulatory evolution.
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Chen, Kuo-Shing, and Wei-Chen Ong. "Dynamic correlations between Bitcoin, carbon emission, oil and gold markets: New implications for portfolio management." AIMS Mathematics 9, no. 1 (2024): 1403–33. http://dx.doi.org/10.3934/math.2024069.
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<abstract> <p>In this paper, we aim to uncover the dynamic spillover effects of Bitcoin environmental attention (EBEA) on major asset classes: Carbon emission, crude oil and gold futures, and analyze whether the integration of Bitcoin into portfolio allocation performance. In this study, we document the properties of futures assets and empirically investigate their dynamic correlation between Bitcoin, carbon emission, oil and gold futures. Overall, it is evident that the volatility of Bitcoin, as well as other prominent returns, exhibit an asymmetric response to good and bad news. Additionally, we evaluate the hedge potential benefits of these emerging futures assets for market participants. The evidence supports the idea that the leading cryptocurrency-Bitcoin can be a suitable hedge instrument after the COVID-19 pandemic outbreak. More importantly, our analysis of the portfolio's performance shows that carbon emission futures are diversification benefit products in most of the considered cases. Notably, incorporating carbon futures into portfolios may attract new investors to carbon markets for double goals of risk diversification. These findings also provide insightful evidence to investors, crypto traders, and portfolio managers in terms of hedging strategy, diversification and risk aversion <sup>[<xref ref-type="bibr" rid="b19">19</xref>,<xref ref-type="bibr" rid="b20">20</xref>,<xref ref-type="bibr" rid="b21">21</xref>,<xref ref-type="bibr" rid="b22">22</xref>,<xref ref-type="bibr" rid="b23">23</xref>,<xref ref-type="bibr" rid="b24">24</xref>,<xref ref-type="bibr" rid="b25">25</xref>]</sup>.</p> </abstract>
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Şeker, Kudbeddin, and Ahmet Gökçe Akpolat. "Dynamic Stochastic Volatility Spillover Between Bitcoin and Precious Metals." Uluslararası Ekonomi İşletme ve Politika Dergisi 9, no. 1 (2025): 53–72. https://doi.org/10.29216/ueip.1596577.
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Since its creation in 2008, Bitcoin has often been compared to precious metals due to their shared characteristics as safe havens, hedges, and risk diversification tools. This study uses the DCC-GARCH model to analyze dynamic conditional correlations and volatility spillovers between Bitcoin and the returns of gold, copper, silver, and platinum. The findings reveal persistent volatility and clustering in the returns of both Bitcoin and these metals. There is a one-way volatility spillover from gold to Bitcoin, and from Bitcoin to copper, silver, and platinum. Significant dynamic conditional correlations are observed between Bitcoin and both gold and copper, while no significant correlations are found with silver and platinum. These results provide valuable insights for portfolio diversification strategies and inform policymaker decisions in financial markets.
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Pavković, Ana, Mihovil Anđelinović, and Ivan Pavković. "Achieving Portfolio Diversification through Cryptocurrencies in European Markets." Business Systems Research Journal 10, no. 2 (2019): 85–107. http://dx.doi.org/10.2478/bsrj-2019-020.
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AbstractBackground: Cryptocurrencies represent a specific technological innovation in financial markets that keeps getting more and more popular among investors around the world. Given the specific characteristics of the cryptocurrencies, this paper examines the possibility of their use as a diversification instrument.Objectives: This paper examines the direction and strength of the relationship between the selected cryptocurrencies and important financial indicators on the European Union market. Since cryptocurrencies are a novelty in the financial system, the empirical literature in this area is rather scarce.Methods/Approach: In order to assess diversification properties of cryptocurrencies for European traders, a comprehensive econometric analysis was carried out. The first part of the analysis refers to the estimation of the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, whereas the second part focuses on wavelet transforms.Results: Bitcoin and Ripple proved as a possible diversification instrument on most of the observed European markets since corresponding coefficients of unconditional correlation are negative.Conclusions: The relationship between the value of the cryptocurrencies and selected indices is generally very weak and slightly negative, indicating that some cryptocurrencies can serve as a means of diversification. However, investors need to take into account the extreme volatility, exhibited in all existing cryptocurrencies.
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Kanwal, Memoona, and Hashim Khan. "Does carbon asset add value to clean energy market? Evidence from EU." Green Finance 3, no. 4 (2021): 495–507. http://dx.doi.org/10.3934/gf.2021023.
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<abstract> <p>This paper examines if clean energy stocks help investors in managing carbon risk. We use the price of the European Union Allowance (EUA) and European clean energy index (ERIX) for the three phases of the EU-Emission Trading Scheme. Analyzing the time-varying correlation and volatility of EUA stock and ERIX through generalized orthogonal GO-GARCH model, the empirical results reveal relative independence of the European renewable energy market from the carbon market providing diversification benefits and value addition by including carbon assets in clean energy stock portfolio. Furthermore, three portfolios with different weight allocation strategies reveal that the carbon asset provides risk and downside risk benefits when mixed with a clean energy stock portfolio. These results are useful for investors who enter the market for value maximization and the regulators striving to make strategies for managing carbon risk.</p> </abstract>
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А.С., Соколицын, Викторова Н.Г., Заборовская О.В. та Конников Е.А. "Нелинейное программирование в задачах оптимизации инвестиционного портфеля". Modern Economy Success, № 6 (11 листопада 2024): 146–53. https://doi.org/10.58224/2500-3747-2024-6-146-153.
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оптимизация портфеля представляет собой задачу многомерного характера, где необходимо учитывать различные критерии, такие как минимизация риска, достижение целевого уровня доходности и обеспечение диверсификации активов. В исследовании использован подход, основанный на минимизации стандартного отклонения доходности портфеля при заданных ограничениях на доли активов, что предотвращает чрезмерную концентрацию капитала на одном активе. Особое внимание уделяется использованию энтропийного показателя для оценки степени диверсификации, что позволяет равномерно распределять капитал среди активов и снижать концентрационные риски. Для оценки риска портфеля используется ковариационная матрица доходностей активов, что позволяет более точно учесть корреляции между активами. В результате были получены оптимальные портфели, характеризующиеся приемлемым уровнем риска и доходности. Представленные результаты показывают, что методы нелинейного программирования обеспечивают эффективное решение задач портфельной оптимизации, минимизируя риски и обеспечивая устойчивость к рыночным колебаниям. Исследование подчеркивает важность интеграции показателей диверсификации и риска для создания сбалансированных инвестиционных портфелей, что делает предложенный подход полезным для практического применения в управлении активами. portfolio optimization is a multidimensional task that requires considering multiple criteria, such as risk minimization, achieving a target return level, and ensuring asset diversification. The study employs an approach based on minimizing portfolio return volatility under constraints on asset shares, preventing excessive concentration of capital in a single asset. Special attention is given to the use of an entropy measure to evaluate the degree of diversification, allowing for balanced capital allocation among assets and reducing concentration risks. The portfolio's risk is assessed using a covariance matrix of asset returns, which more accurately captures the correlations between assets. The results demonstrate optimal portfolios characterized by acceptable levels of risk and return. The findings indicate that nonlinear programming methods provide an effective solution for portfolio optimization, minimizing risks and ensuring resilience to market fluctuations. The study highlights the importance of integrating diversification and risk measures to create balanced investment portfolios, making the proposed approach valuable for practical asset management applications.
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Saiti, Buerhan, Yusuf Ma, Ruslan Nagayev, and İbrahim Güran Yumusak. "The diversification benefit of Islamic investment to Chinese conventional equity investors." International Journal of Islamic and Middle Eastern Finance and Management 13, no. 1 (2019): 1–23. http://dx.doi.org/10.1108/imefm-01-2018-0014.
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Purpose The purpose of this paper is to investigate the extent to which Chinese equity investors can benefit from diversifying their portfolio into Shariah-compliant (Islamic) indices. It examines three Islamic stock indices (FTSE Shariah China price index, MSCI China Islamic IMI price index and the DJ Islamic Greater China price index) and ten sectoral indices in Shanghai Stock Exchange as a sample. Design/methodology/approach The multivariate GARCH dynamic conditional correlations (MGARCH-DCC) is deployed to estimate the time-varying linkages of returns of the selected indices, covering approximately eight years daily data starting from 28 August 2009 to 29 September 2017. Findings In general, in terms of volatility, the results indicate that all Islamic Indices are less volatile than the conventional indices. From the correlation analysis, the results imply that Chinese conventional equity investors would benefit from Islamic stock indices, especially when they include DJ Islamic Greater China in their portfolio. Originality/value The findings of this paper may have several significant implications for the Chinese equity investors and fund managers for better understanding about co-movements of the Chinese conventional sectoral indices with the Shariah-compliant stock indices with the purpose of gaining higher risk-adjusted returns through portfolio diversification.
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Sarwat, Ayesha, and Hameeda Akhtar. "Non-Financial Markets and Interconnectedness between US and Emerging Financial Economies: Evidence from Covid-19 Financial Crisis." Bulletin of Business and Economics (BBE) 12, no. 4 (2023): 238–53. http://dx.doi.org/10.61506/01.00108.
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During times of financial turmoil, when traditional assets experience significant volatility, commodity markets provide diversification benefits to investors. The objective is to investigate the factors influencing financial contagion between the United States and emerging Asian equity markets (China and India). The study analyzes the influential impact of the volatility index, gold, oil, and USD index on financial contagion among the markets. The dynamic conditional correlation analysis is utilized to explore the correlations during the US subprime and Covid-19 crises, and quantile regression analysis is conducted at different levels of time-varying correlations. The study's results suggest that financial contagion becomes more pronounced during periods of financial turmoil, and global financial crises contribute to alterations in the dependence structure between financial contagion among equity markets and global macroeconomic risk factors. The effect of financial contagion can be abridged through altering portfolio reallocation strategies according to investors’ risk appetite during high market volatility.
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Abdullah, Ahmad Monir, Hishamuddin Abdul Wahab, Abul Mansur Mohammed Masih, Mariani Abdul Majid, and Wai-Yan Wong. "THE CO-MOVEMENT OF CHINA AND US STOCK INDICES: A PORTFOLIO DIVERSIFICATION ANALYSIS." Journal of International Studies 19, no. 1 (2023): 1–35. http://dx.doi.org/10.32890/jis2023.19.1.1.
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The aim of this article is to find diversification opportunities by examining the time-varying and time-scale-based volatility andcorrelation of the US and Chinese stock market indices with crude oil, gold and Bitcoin price returns, as well as the exchange rate ofthe Chinese Yuan Renminbi against the US Dollar (CNY/USD) using a vector error correction model (VECM), namely, maximumoverlap discrete wavelet transformation (MODWT). Furthermore, individual and institutional investors may also reduce the risk of theirinvestment portfolio by investing in commodities and stock markets from countries with a negative or substantially low correlation. Our VECM result shows that Bitcoin, crude oil and CNY/USD lead the other variables under consideration, indicating that changes in the prices of Bitcoin, crude oil and CNY/USD affect the US and Chinese stock market indices, as well as gold. Our research utilising theMODWT technique shows that Bitcoin leads crude oil at almost all levels, indicating that crude oil prices will respond to Bitcoinprice movement in the long and medium term. However, investors may be deterred from using Bitcoin as a diversification tool due toits extreme volatility. The research also indicates that diversification with gold may help US investors. However, the continuous wavelettransformation finding shows that the diversification benefit effects will persist for a holding period of little more than 64 days. Our study results tend to emphasise the significance of using reasonably modern methods to identify diversification possibilities for investors with diverse investment horizons or holding stocks for various periods.
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Shikha. "Analysis of the Dynamic Conditional Correlation among Financial Assets and the Value at Risk of the Portfolio, Featuring Gold USD and Cryptocurrency." Journal of Information Systems Engineering and Management 10, no. 9s (2025): 616–27. https://doi.org/10.52783/jisem.v10i9s.1288.
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This paper examines the risk-return attributes, interrelations, and diversification capabilities of Gold and prominent cryptocurrencies—Bitcoin, Ethereum, and XRP—utilizing sophisticated econometric models, such as Dynamic Conditional Correlation (DCC-GARCH) and Value at Risk (VaR) techniques. The research indicates that gold demonstrates low volatility and functions as a reliable hedge against the high-risk, high-reward characteristics of cryptocurrencies, especially Ethereum. The weak correlations across cryptocurrencies indicate little co-movement, emphasizing their distinct risk profiles and diversification potential within the digital asset market. The results underscore the significance of adaptive risk management systems, since correlations and volatilities fluctuate under severe market situations. The findings provide essential insights for investors and regulators, providing direction for the creation of resilient portfolios that harmonize stability and growth across both conventional and digital assets.
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Contreras-Valdez, Mario I., José Antonio Núñez, and Guillermo Benavides Perales. "Bitcoin in Portfolio Selection: A Multivariate Distribution Approach." SAGE Open 12, no. 2 (2022): 215824402210961. http://dx.doi.org/10.1177/21582440221096124.
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This study presents a multivariate study regarding Bitcoin and its interactions with other financial assets of different classes. This is done by adjusting a multivariate semi heavy-tailed distribution to portfolios containing indexes, currencies, and commodities and one cryptocurrency. Later, a rolling window is deployed to obtain the dynamic parameters of the distribution in a weekly basis. With a Markowitz specification problem, the optimal portfolio weights are computed dynamically using the parameters of the multivariate NIG distribution as inputs. The results provide evidence that correlations of Bitcoin with other assets may provide certain degree of diversification to portfolios; nevertheless, the high volatility of this asset makes it unpractical to employ in significant weights. This paper is relevant for researchers and practitioners as it provides a new tool to manage portfolios with cryptocurrencies and more reliable weights to the asset allocation.
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Saiti, Buerhan, and Nazrul Hazizi Noordin. "Does Islamic equity investment provide diversification benefits to conventional investors? Evidence from the multivariate GARCH analysis." International Journal of Emerging Markets 13, no. 1 (2018): 267–89. http://dx.doi.org/10.1108/ijoem-03-2017-0081.
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Purpose The purpose of this paper is to quantify the extent to which the Malaysia-based equity investors can benefit from diversifying their portfolio into the conventional and Islamic Southeast Asian region and the world’s top ten largest equity indices (China, Japan, Hong Kong, India, the UK, the USA, Canada, France, Germany and Switzerland). Design/methodology/approach The multivariate GARCH-dynamic conditional correlation is deployed to estimate the time-varying linkages of the selected conventional and Islamic Asian and international stock index returns with the Malaysian stock index returns, covering approximately eight years daily starting from 29 June 2007 to 30 June 2016. Findings In general, in terms of volatility, the results indicate that both Asian and international Islamic stock indices are more or less volatile than its conventional counterparts. From the correlation analysis, we can see that both the conventional and Islamic MSCI indices of Japan provide more diversification benefits compared to Southeast Asian region, China, Hong Kong and India. Meanwhile, in terms of international portfolio diversification, the results tend to suggest that both the conventional and Islamic MSCI indices of the USA provide more diversification benefits compared to the UK, Canada, France, Germany and Switzerland. Originality/value The findings of this paper may have several significant implications for the Malaysia-based equity investors and fund managers who seek for the understanding of return correlations between the Malaysian stock index and the world’s largest stock market indices in order to gain higher risk-adjusted returns through portfolio diversification. With regard to policy implications, the findings on market shocks and the extent of the interdependence of the Malaysian market with cross-border markets may provide some useful insights in formulating effective macroeconomic stabilization policies in the efforts of preventing contagion effect from deteriorating the domestic economy.
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Chandra, Reddy. "INTERMARKET INFLUENCE BETWEEN TRADITIONAL STOCK MARKETS AND CRYPTOCURRENCIES: A CASE STUDY OF JSX AND BTC." JMBI UNSRAT (Jurnal Ilmiah Manajemen Bisnis dan Inovasi Universitas Sam Ratulangi). 11, no. 1 (2024): 1252–72. http://dx.doi.org/10.35794/jmbi.v11i1.57609.
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This study explores the intermarket dynamics between the Jakarta Stock Exchange Composite Index (JSX) and Bitcoin (BTC), focusing on their behavior during periods of market stress, such as the COVID-19 pandemic. Using historical data from 2017 to 2024, the research employs volatility analysis, Vector Autoregression (VAR) models, and correlation analysis to investigate the volatility spillovers and interdependencies between these two distinct markets. The findings reveal that BTC exhibits significantly higher volatility compared to JSX and USD/IDR, underscoring its high-risk nature. The study also uncovers that while volatility spillovers from JSX to BTC are present, the reverse is less pronounced, suggesting that traditional stock markets can influence cryptocurrency markets during periods of economic stress. The results have important implications for investors, highlighting the need for careful risk management and portfolio diversification strategies, especially in emerging markets like Indonesia.