Energy Commodity Price Risk Minimization with Precious Metals in a Multivariate Portfolio
Damnjanovic, Jelena; Papic-Blagojevic, Natasa; Živkov, Dejan
Year: 2022 Volume: 72 Issue: 1 Pages: 50-70
Abstract: This paper constructs four minimum-variance multivariate portfolios, combining energy commodities (Brent oil, WTI oil, gasoline and natural gas) with precious metals (gold, silver, platinum and palladium). In order to reflect different situations of market participants, we impose constraints of minimum energy share in portfolio in amount of 30% and 70%. Portfolio optimization indicates that highest share in all portfolios have gold, while only in two cases some tiny percentage goes to palladium. Silver and platinum do not have share in portfolios, whatsoever. We find more risk reduction in 30% portfolios, than in 70% portfolios, which means that investors who want to pursue less risky energy-portfolio should include more gold in portfolio. Examining some characteristics of portfolios, we find that portfolio with natural gas has the lowest downside risk, in both 30% and 70% energy-portfolios. According to various hedge effectiveness indices, in most cases, the most effective risk-reduction we find in portfolio with natural gas. Brent portfolio has the highest Sharpe and Sortino ratio, but when mCVaR is taken into account, then natural gas has the best return-risk results.
JEL classification: G11, Q02
Keywords: minimum-variance portfolio, energy, precious metals, risk-adjusted ratios
DOI: https://doi.org/10.32065/CJEF.2022.01.03
RePEc: https://ideas.repec.org/a/fau/fauart/v72y2022i1p50-70.html
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