Effects of idiosyncratic jumps and co-jumps on oil, gold, and copper markets

Artur Semeyutin, Giray Gozgor, Chi Keung Marco Lau, Bing Xu

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Abstract

Using one-minute oil, gold and copper futures price from September 27, 2009, to July 1, 2020, this paper examines the effects of systematic and idiosyncratic (market-specific risk) jumps on intraday correlations, portfolio allocation decisions, and diversification benefits. We identify that these commodities contain high proportions of market-specific price discontinuities, which do not translate into systematic jumps. Co-jumps in the same direction lead to higher correlations and imply reduction in diversification benefits, while co-jumps in the opposite direction reduce correlations and positively affect diversification, similar to the idiosyncratic jumps. The results also demonstrate that the risk-averse investor’s gold portfolio allocations are not affected by co-jumps and are free from the non-diversifiable risks in oil and copper markets. However, idiosyncratic jumps in oil and copper markets increase allocations to gold. In contrast, allocations to copper and oil are significantly affected by the systematic risks outlined in copper–gold and oil–gold pairs, pushing risk-averse investors to oil from copper–gold and copper from oil–gold systematic risks. Finally, diversification benefits from price discontinuities are overall positive and driven by the idiosyncratic jumps in oil and copper markets when the minimum variance portfolio allocations are used.
Original languageEnglish
Article number105660
JournalEnergy Economics
Volume104
Early online date14 Nov 2021
DOIs
Publication statusPublished - Dec 2021

Keywords

  • COVID-19 pandemic
  • Copper market
  • Gold market
  • Jumps and Co-jumps
  • Oil market
  • Portfolio allocations

ASJC Scopus subject areas

  • Economics and Econometrics
  • Energy(all)

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