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Realizing Correlations Across Asset Classes

Author

Listed:
  • Niels S. Grønborg

    (Aarhus University, CREATES, and The Danish Finance Institute)

  • Asger Lunde

    (Aarhus University and CREATES)

  • Kasper V. Olesen

    (Bank of America Merrill Lynch)

  • Harry Vander Elst

    (Coller Capital & ECARES)

Abstract

We introduce a simple and intuitive approach of modeling and forecasting correlations for use in portfolio optimization. The model is composite in nature and consists of elements based on a bivariate realized volatility model. Importantly, our framework allows for volatility spill-overs between assets which provide an edge compared to competing models when forming portfolios. We apply the model to high-frequency data for commodity markets and demonstrate significant economic gains for an investor basing portfolio decisions on our modeling framework. This gain is significant in economic terms, even after imposing realistic constraints on short selling and portfolio turnover.

Suggested Citation

  • Niels S. Grønborg & Asger Lunde & Kasper V. Olesen & Harry Vander Elst, 2018. "Realizing Correlations Across Asset Classes," CREATES Research Papers 2018-37, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-37
    as

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    File URL: https://repec.econ.au.dk/repec/creates/rp/18/rp18_37.pdf
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Commodities; futures markets; portfolio selection; Realized Beta GARCH;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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