Portfolio management and dependencies among precious metal markets: Evidence from a Copula quantile-on-quantile approach

Abstract

This study examines the dependence structure among four major precious metal markets: gold, palladium, platinum, and silver. Using the novel Copula Quantile-on-Quantile Regression (C-QQR) approach of Sim (2016), we show that precious metals share a systemic relationship despite their different demand-supply interplays, applications, and the macroeconomic factors, which influence their values. Our results also suggest that correlations among markets do not remain constant over time. Furthermore, we identify the quantiles of returns for two metals where maximum benefits of negative correlations can be obtained to enhance portfolio diversification. This knowledge provides an opportunity for hedgers to decide when they should avoid going long or short on a particular metal. Finally, we find that our approach determines optimal portfolio weights that can reduce risk in metals markets more efficiently than traditional, conditional covariance-based approaches. - 2019