Diversification In Crude Oil And Other Commodities: A Comparative Analysis

An understanding of how volatilities of and correlations between commodity returns change over time including their directions (positive or negative) and size (stronger or weaker) is of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is an humble attempt to add value to the existing literature by empirically testing the ‘timevarying’ and ‘scale dependent’ volatilities of and correlations of the sample commodities. Particularly, by incorporating scale dependence, it is able to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons or holding periods. In order to address the research objectives, we have applied the vector error-correction test and several recently introduced econometric techniques such as the Maximum Overlap Discrete Wavelet Transform (MODWT), Continuous Wavelet Transform (CWT) and Multivariate GARCH – Dynamic Conditional Correlation. The data used in this paper is the daily data of seven commodities (crude oil, gas, gold, silver, copper, soybean and corn) prices from 1 January 2007 until 31 December 2013

THE CO-MOVEMENT OF CHINA AND US STOCK INDICES: A PORTFOLIO DIVERSIFICATION ANALYSIS

The aim of this article is to find diversification opportunities by examining the time-varying and time-scale-based volatility and correlation of the US and Chinese stock market indices with crude oil, gold and Bitcoin price returns, as well as the exchange rate of the Chinese Yuan Renminbi against the US Dollar (CNY/USD) using a vector error correction model (VECM), namely, maximum overlap discrete wavelet transformation (MODWT). Furthermore, individual and institutional investors may also reduce the risk of their investment 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 the MODWT technique shows that Bitcoin leads crude oil at almost all levels, indicating that crude oil prices will respond to Bitcoin price movement in the long and medium term. However, investors may be deterred from using Bitcoin as a diversification tool due to its extreme volatility. The research also indicates that diversification with gold may help US investors. However, the continuous wavelet transformation 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

Risk-taking behavior and capital adequacy in a mixed banking system: new evidence from Malaysia using dynamic OLS and two-step dynamic system GMM estimators

This study is the first attempt to investigate the relationship between the level of risky assets and capital level in a mixed Malaysian banking system covering 83 months starting December 2006. The results of dynamic ordinary least squares indicate positive relationship between capital ratio (CAR) and risk-weighted asset ratio (RWA) in the long run. Furthermore, the causality analysis based on panel VECM 15 and two-step dynamic system generalized method of moments indicates unidirectional causality from CAR to RWA. Our results further suggest that higher capital growth and capital buffer provide an extra cushion for the Malaysian banks to pursue relatively riskier financial activities, and the nature of risk-taking behavior of Islamic banks follows that of the conventional banks

The dynamics of Australian stock indices and commodities based on MGARCH-DCC and wavelet techniques

This paper aims to investigate the extent of hedging and diversification opportunities available for an Australian investor who holds a portfolio consisting of Australian conventional and Islamic indices, crude oil, gold, Bitcoin, and the Australia-US exchange rate of daily data from 2011 to 2021. The relevant time-varying and time-scale dependent techniques, such as MGARCH dynamic conditional correlation (MGARCH-DCC), continuous wavelet transform (CWT), and maximal overlap discrete wavelet transform (MODWT) are employed to discern the correlation and volatilities of the variables. The paper's unique contribution lies in unveiling an Australian investor's diversification opportunities of a portfolio containing Bitcoin, gold, oil, Islamic indices, conventional indices, and exchange rates. Findings from MGARCH-DCC analysis suggest that Bitcoin is the least correlated variable. However, investors may be discouraged from choosing Bitcoin as a diversification instrument due to its high volatility. The evidence further suggests that Australian investors may benefit from diversification with gold. Nonetheless, the CWT result shows that the diversification benefits effects will last for a holding period no longer than 64 days. Our research findings tend to indicate the importance of finding diversification opportunities for investors with heterogeneous investment holdings over various periods by utilising relatively advanced techniques