Kauppatieteellinen tiedekunta, 2017
Laskentatoimi ja rahoitus
Master's Degree Programme in Finance
After the financialization of commodity market in the early 2000s, correlation dynamics be-tween commodity derivatives and financial assets have been under increasing focus of the literature concerning portfolio modeling and analytics. The notion that the commodity in-vestments normally exhibit low correlation with conventional assets such as bonds stems from the nature of commodities’ price formation through traditional supply and demand conditions. However, recent changes in the composition of commodity market participants as well as the turbulent periods in the world economy have altered the typical price relationships between the commodity derivatives and other financial assets.
This study investigates bond-commodity correlations in the Eurozone under different market regimes characterized with varying degree of uncertainty. Focus is on finding hedge and safe haven qualities between the assets and modeling these attributes when markets face common shocks and when systemic stress in the Eurozone rises. The representative commodity products are commodity futures representing a subset of commodities actively traded and used as financial assets. These are precious and industrial metal futures and oil futures. Eurozone bonds are represented by five government bond series capturing the broad spectrum of European economies. Achieved results are applicable in portfolio management, risk management and in estimation of effects of policy implementation.
The results show that the correlations are non-stationary and vary over time. Four different observations are made based on the results. Industrial metals and oil exhibit promising hedge properties for bonds of robust economies, gold continues to perform as a strong portfolio diversifier through the sample, increased market stress has negative effect on aforementioned correlations and correlations against North and Central European bonds are most negatively affected by the rise in systemic stress.
Commodity futures, Government bonds, Systemic stress, Portfolio diversi-fication, Cross-market correlation dynamics