Dynamic Commodity Portfolio Management: A Regime-switching VAR Model

Abstract

This article examines the impact of dynamic economic states on commodity portfolio performance by using Markov regime-switching vector autoregression (MRS-VAR) framework. Temporal behaviour of different assets in portfolio has been studied using weekly dataset. Empirical evidence finds prevalence of regime-switching phenomenon in all assets suggesting their state-dependent behaviour. Results of the study confirm that a pair of asset classes exhibits different levels of correlations under different economic scenarios. Optimal asset allocation under each regime has been investigated and the results provide evidence of differential optimal commodity portfolio composition in distinct economic states. The results of the study provide interesting insights for investors and portfolio managers. By examining the switching points in different asset classes, they can rebalance their portfolio which will help them in better risk management and enhancing risk–return performance.