How to combine precious metals with corn in a risk-minimizing two-asset portfolio?

Abstract

This paper tries to find out which precious metal futures are the best hedging tools for corn spot commodity, taking into account three different risk measures – variance (Var), value at risk (VaR), and conditional value at risk (CVaR). For computation purposes, we use an optimal dynamic conditional correlation (DCC) specification for every considered pair. Our findings indicate that portfolio with gold outperforms the other three precious metals (silver, platinum, and palladium) with respect to all three risk metrics. The reason for such findings is two-fold. First, gold has the lowest average dynamic correlation with corn (below 11%), and gold also has the lowest average risk of all precious metals. The second-best combination is corn-platinum, whereas the corn-silver pair gives the worst hedging results. This happens because silver has the highest average dynamic correlation with corn (14.5%), but more importantly, silver is the riskiest commodity, which makes this asset unsuitable for combining with corn. According to the results, the ratio between corn and gold in a two-asset portfolio should be about 27 : 73.

Modeling the symmetric relation between Baltic Exchange indexes

“…The results suggest that the correlation between the financial markets changes in a complex manner. Also, Zivkov et al (2021) studied the multiple dependence structure between the four precious metals (gold, silver, platina and palladium) and their optimal and nonoptimal price spillover by using vine copula structures and calculating the optimal and nonoptimal value at risk (VaR) ( Zivkov et al, 2021). According to their findings, dependence structures between the mentioned metals are different from each other, and each of them has a specific tail dependence and mean.…”