IMIB Journal of Innovation and Management

Does Risk Return Trade-off Hold in Base Metal and Bullion Commodity Assets? A Bayesian Change Point Analysis

Sangram Keshari Jena¹ and Aviral Kumar Tiwari²

First Published 13 Dec 2023. https://doi.org/10.1177/ijim.231199540

Article Information

Volume 2, Issue 1 January 2024

Corresponding Author:

Sangram Keshari Jena, International Management Institute, Bhubaneswar, Odisha 751003, India.
Email: sangram.jena@imibh.edu.in

¹International Management Institute, Bhubaneswar, Odisha, India
²Indian Institute of Management, Bodh Gaya, Bihar, India

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 License (http://www.creativecommons.org/licenses/by-nc/4.0/) which permits non-Commercial use, reproduction and distribution of the work without further permission provided the original work is attributed.

Abstract

The risk-return trade-off is fundamental to portfolio investing whose stability is critical for portfolio optimisation. Since the relationship is dynamic, the portfolio manager should know the point of change and, thereafter duration of the changed period with certainty. First, we have done Bayesian change point analysis, and then based on the analysis, the study identifies the regimes having equal statistical variance along with the corresponding average return in two most popular commodities, that is, copper and gold. It is found that risk-return trade-off is not stable. Further, in a higher volatility regime, only gold can be considered as a diversifiable commodity because a positive risk-return trade-off holds. But in a low volatility regime, both commodities lose their diversification properties as the risk-return relation becomes negative.

Keywords

Risk return trade-off, commodity futures, Bayesian Change point, portfolio investing

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