Time‐varying dynamics of expected shortfall in commodity futures markets

Abstract

Motivated by the growing interest of investors in commodities and by advances in risk measurement, we present a full‐scale analysis of expected shortfall (ES) in commodity futures markets. Besides illustrating the dynamics of historic ES, we evaluate whether popular estimators are suitable for forecasting future ES. By implementing a new backtest, we find that the performance of estimators hinges on market stability. Estimators tend to fail when markets are in turmoil and accurate forecasts are urgently needed. Even though a kernel method performs best on average, our results advise against the use of established estimators for risk (and margin) prediction.

A comparison of minimum variance and maximum Sharpe ratio portfolios for mainstream investors

“…In comparison, commodities are not in line with a traditional risk-return trade-off because they exhibit the lowest return (mean 0.12%) and the highest risk (standard deviation 6.51%). However, this is largely related to a commodity market crash in 2008 (see Mehlitz and Auer, 2021). Low index correlations of 0.31 (stock-bond), 0.27 (bond-commodity) and 0.32 (stock-commodity), which Turning to the stock subindices, we see that stock return features are quite different across industries (see also Heston and Rouwenhorst, 1995;Hou and Robinson, 2006).…”

Unprofitability of food market investments

“…Third, there is a growing literature popularizing forward‐looking estimation of portfolio optimization inputs (see Vinzelberg & Auer, 2021). Because food futures are more predictable than other assets (see Mehlitz & Auer, 2021), they may turn out to be more beneficial in a forward‐looking framework than in a backward‐looking one. Finally, another interesting research question deals with the performance of food‐related stocks (see Daskalaki, 2021; Simonian, 2020).…”

“…First, we compare benchmark and food‐extended portfolios during National Bureau of Economic Research (2021) recession periods. Second, we characterize months of turbulent equity markets via the bear, falling, and extreme market definitions of Pagan and Sossounov (2003) and Mehlitz and Auer (2021) and then compare those months. In all cases, food inclusion does not improve portfolio performance.…”

Does safe haven exist? Tail risks of commodity markets during COVID-19 pandemic

“…Second, this study contributes to the international finance literature by measuring the tail risk of gold and other commodities through the estimation of a joint dynamic model of expected shortfall (ES) and value-at-risk (VaR) (see, for example, Kwon, 2020 ; Mehlitz and Auer, 2021 ). The advantage of this joint modelling approach is in its explicit satisfaction of the subadditivity assumption.…”

“…On one side, the past studies have mostly employed the tail risk of VaR, which ignores the shape and structure of the tail and is not a sub-additive risk measure ( Artzner et al, 1997 , 1999 ; Lazar and Xue, 2020 ). On the other side, fewer papers have incorporated estimations of tail risk in commodities through ES modelling (see, for example, Feng et al, 2018 ; Kwon, 2020 ; Mehlitz and Auer, 2021 ; Reboredo, 2013 ; Stavroyiannis, 2018 ). However, those papers solely estimate ES, but the ES is itself not elicitable as per the statistical decision theory ( Gneiting, 2011 ; Fissler and Ziegel, 2016 ; Ziegel, 2016 ).…”