Portfolio diversification during recent stress and stress-free episodes: insights from three alternative portfolio methods

The objective of this paper is to examine the structure as well as the performance of different investment strategies using two asset classes (stocks and commodities) and different portfolio methods. More specifically, we construct different portfolios using three diversification strategies-the traditional minimum-variance portfolio strategy, the minimum-correlation portfolio strategy, and the minimum-connectedness portfolio strategy-and compare them. Our results show that the natural gas market seems to be the most isolated market. Moreover, agricultural commodity markets appear to be broadly insensitive to shocks on non-agricultural commodity markets, which support the thesis stating that commodity markets are potentially segmented. The results also suggest a relatively high connectedness among pure financial markets on average and across the entire sample period, and a relatively low connectedness among regional stock markets and long-term commodity futures markets. The GCC stock market is largely disconnected from other regional financial markets. The portfolio analysis show that the performance of the different investment strategies was largely equivalent in terms of cumulative returns. Furthermore, from mid-2019 to mid-2021, and going through the COVID-19 period, the portfolio strategy composed of regional indices and short-term commodity futures contracts, under the minimum-variance approach, outperforms the other investment strategies. However, the same portfolio strategy, but under the minimum-connectedness approach, outperforms all other investment strategies from mid-2021 and during the ongoing Russian-Ukrainian war period.