On the last decades, there is an increased trend towards energy markets due to the
commodity financialization, as a number of researchers and investors try to identify the
potential inter-dependencies between commodities and the stock market. That interrelations become of paramount importance in Europe as a result of high financial
integration among countries. In terms of risk and portfolio management, there is an
exhaustive effort of stakeholders to examine the potential excess return and
diversification benefits that commodities could add to different portfolio combinations.
This dissertation aims to investigate whether a potential investor is better off including a
commodity on his/her portfolio and simultaneously to determine if dynamic portfolios,
in terms of time-varying volatility, outperform static ones. On this context, different
econometric models were used, under the mean-variance framework with a certain level
of risk-aversion, and a combination of different portfolios, including Brent two stock
indexes and a risk-free asset, were constructed. Furthermore, the optimization strategies
were separated regarding the perspective of a potential investor towards maximizing
returns or minimizing the risk of the portfolio. The empirical results indicate that both
objectives hold, implying that adding Brent to a portfolio while also implementing
dynamic asset allocation strategies, enhances portfolio optimal risk-return tradeoff and
offers diversification benefits to a potential investor. Moreover, the robustness of the
results is confirmed across in-sample and out-of sample analysis, and rebalancing
strategies with respect to transaction costs.
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