Dependence structure of the commodity and stock markets, and relevant multi-spread strategy

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Understanding the dependence structure between the commodity and stock markets is a crucial issue in constructing a portfolio. It can also help us to discover new opportunities to implement spread trading using multiple assets classified in the two different markets. This study analyzed the dependence structure of the commodity and stock markets using the random matrix theory technique and network analysis. Our results show that the stock and commodity markets must be handled as completely separated asset classes except for the oil and gold markets, so the performance enhancement of the mean-variance portfolio is significant as expected. In light of the fact that WTI 1 month futures and four oil-related stocks are strongly correlated, they were selected as basic ingredients to complement the multi-spread convergence trading strategy using a machine learning technique called the AdaBoost algorithm. The performance of this strategy for non-myopic investors, who can endure short-term loss, can be enhanced significantly on a risk measurement basis. Crown Copyright (C) 2011 Published by Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2011-10
Language
English
Article Type
Article
Keywords

CROSS-CORRELATIONS; FINANCIAL-MARKETS; TIME-SERIES; ARBITRAGE

Citation

PHYSICA A-STATISTICAL MECHANICS AND ITS APPLICATIONS, v.390, no.21-22, pp.3842 - 3854

ISSN
0378-4371
URI
http://hdl.handle.net/10203/100295
Appears in Collection
PH-Journal Papers(저널논문)
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