This paper examines the time-varying dependence structure of commodity futures portfolios based on multivariate dynamic copula models. The importance of accounting for time-variation is emphasized in the context of the Basel traffic light system. We enhance the flexibility of this structure by modeling regimes with multivariate mixture copulas and by applying the dynamic conditional correlation model (DCC) to multivariate elliptical copulas. The most suitable dynamic dependence model in terms of in-sample and out-of sample valuation is the dynamic Student-tClayton mixture copula, followed by the dynamic Student-t copula, and the dynamic Gaussian-Clayton mixture. In comparison to the multivariate normal model, the dynamic Clayton copula also scales down significantly the number of VaR(99%) violations during the 2007/08 financial crisis period. The predictive performance of our multivariate dynamic copula models confirms its superiority over bivariate regime-switching copula models for various states of the economy.

In this article we discuss whether commodities should be included as an asset class when establishing portfolios. By investigating second order stochastic dominance relations, we find that the stock and bond indices used tend to dominate the individual commodities. We further study if we can find a combination of stocks, bonds and commodities that dominate others. Compared to a 60 percent stock and 40 percent bond portfolio mix, portfolios consisting of long positions in gold futures and two different actively managed indices are the only commodity investments to be included as long positions in a stock/ bond portfolio. The results should be of interest for fund managers and traders that seek to improve their risk-return trade off compared to the traditional 60/ 40 portfolio.

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In this study, we evaluate the out-of-sample diversification benefits of including hedge fund indexes in global stock-bond portfolios. We investigate this topic by evaluating several asset allocation strategies in the period from 1998 to 2016. Interestingly, our findings show, in general, no significant increase in performance when we include hedge funds in a portfolio, compared to a well-diversified portfolio as a benchmark. We observe a certain degree of risk reduction when including hedge funds in the portfolio, but the performance does not improve significantly, on average. We extend the literature on portfolio performance when including hedge funds in a multi-asset portfolio, using more asset allocation strategies and a comprehensive dataset, compared to previous studies.

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