Quantitative Finance > Statistical Finance
[Submitted on 23 Jul 2013 (v1), last revised 10 Feb 2015 (this version, v2)]
Title:Are benefits from oil - stocks diversification gone? New evidence from a dynamic copula and high frequency data
View PDFAbstract:Oil is perceived as a good diversification tool for stock markets. To fully understand this potential, we propose a new empirical methodology that combines generalized autoregressive score copula functions with high frequency data and allows us to capture and forecast the conditional time-varying joint distribution of the oil -- stocks pair accurately. Our realized GARCH with time-varying copula yields statistically better forecasts of the dependence and quantiles of the distribution relative to competing models. Employing a recently proposed conditional diversification benefits measure that considers higher-order moments and nonlinear dependence from tail events, we document decreasing benefits from diversification over the past ten years. The diversification benefits implied by our empirical model are, moreover, strongly varied over time. These findings have important implications for asset allocation, as the benefits of including oil in stock portfolios may not be as large as perceived.
Submission history
From: Jozef Barunik [view email][v1] Tue, 23 Jul 2013 09:02:11 UTC (335 KB)
[v2] Tue, 10 Feb 2015 20:54:01 UTC (374 KB)
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