Abstract
In this paper, we performed a stress-testing for a portfolio of commodity futures, which mimics the dynamics of the DJ-UBS index. We identified extreme events that impacted commodity prices over time, and looked at correlation structures in a dynamic way, with copula functions. In line with Basel III financial regulations, we derived baseline, historical, and hybrid scenarios and discussed their advantages and shortfalls. We found that the financialization of commodity markets led to an increase in correlations and in the probability for joint extremes. However, we identified structural breaks in commodity markets that temporarily led to a breakdown of expected statistical patterns and of traditional dependence structures among commodities. This fact shows the need for forward-looking stress testing techniques, like hybrid and hypothetical scenarios, as encouraged by financial regulators.
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© 2016 Springer International Publishing Switzerland
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Mudry, PA., Paraschiv, F. (2016). Stress-Testing for Portfolios of Commodity Futures with Extreme Value Theory and Copula Functions. In: Fonseca, R., Weber, GW., Telhada, J. (eds) Computational Management Science. Lecture Notes in Economics and Mathematical Systems, vol 682. Springer, Cham. https://doi.org/10.1007/978-3-319-20430-7_3
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DOI: https://doi.org/10.1007/978-3-319-20430-7_3
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-20429-1
Online ISBN: 978-3-319-20430-7
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