Tail risk optimized portfolio across states in Asia-Pacific markets with higher-order dependence

ABSTRACT

This paper investigates energy commodities’ ability to diversify an equity portfolio across Asia-Pacific Markets. The joint behaviour of the energy commodities and stock index as noted through its shape, changed both temporally and across regime changes. Restricting short selling of stock index by assigning a greater than zero weight on the equity index improved return from the portfolio across regimes. The tail risk optimized portfolio gave the best risk-return trade-off. Though this was the case, one could use VaR and variance as risk measures with higher-order dependence on copulas in the optimization, if there were no constraints on portfolio returns.

KEYWORDS:

• Energy commodities
• equity
• tail risk
• VaR
• copula
• optimization

JEL classification:

• Q02
• G11
• G32
• C61

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Saurav Kumar

Saurav Kumar is a Program Associate in Enterprise Analytics and Data Science (EADS) team at Wells Fargo, Bengaluru. He holds an Integrated Dual Degree (MTech in Financial Engineering and BTech in Metallurgical and Materials Engineering) from Indian Institute of Technology, Kharagpur.

Sujoy Bhattacharya

Sujoy Bhattacharya is an Associate Professor at Indian Institute of Technology, Kharagpur. He holds a PhD from Indian Institute of Information Technology and Management, Gwalior. His research areas are Data Analytics, Option Pricing, and Quantitative Marketing.

Satrajit Mandal

Satrajit Mandal is a PhD Student at Indian Institute of Technology, Kharagpur. He holds a MS in Financial Mathematics from the University of Tartu. His research areas are Option Pricing and Portfolio Theory.