Rand Kwong Yew Low

Vine copulas: modelling systemic risk and enhancing higher-moment portfolio optimisation

Asymmetric dependence in equities markets has been shown to have detrimental effects on portfolio diversification as assets within the portfolio exhibit greater correlations during market downturns compared to market upturns. By applying the Clayton canonical vine copula (CVC) to model asymmetric dependence, we produce a measure of systemic risk across a portfolio of assets. In addition, we use the Clayton CVC to produce estimates of expected returns in an application to higher-moment portfolio optimisation and find evidence of an improvement in performance across a range of risk-adjusted return measures and the indices of acceptability.

How Do Portfolio Weighting Schemes Affect Commodity Futures Risk Premia

This paper develops a long-short portfolio construction technique that captures the fundamentals of backwardation and contango and simultaneously deviates from the equal-weighting scheme traditionally employed in the commodity literature. We find that the sophisticated weighting schemes based on risk minimization and risk timing dominate the traditional naive equal-weight allocation and the schemes based on utility maximization. Our findings apply to the consideration of long-short portfolios based on momentum, term structure, hedging pressure, and speculative pressure. The conclusions robustly persist after accounting for transaction costs, illiquidity, data mining, various model specifications, and different sub-periods.We examine whether and to what extent successful equities investment strategies are transferrable to the commodities futures market. We investigate a total of 7 investment strategies that involve optimization and mean-variance timing techniques. To account for the unique characteristics of the commodity futures market, we propose a novel method of classification based on momentum or term structure properties in the formation of long-short portfolios in conjunction with the quantitative strategies from the equities literature. Our strategies generate significant excess returns and risk-adjusted performances as measured by the Sharpe and Sortino ratios and the maximum drawdown. We find no significant correlation between the strategies’ excess returns and common risk factors. There is no evidence that excess returns are a compensation for liquidity risk. The strategies are robust to transaction costs and choice of model parameters and exhibit stable performance across various market environments including times of financial crises.

Monitoring Transmission of Systemic Risk from Shadow Banking to Regulated Banking

There is a need to introduce a statistical method to the toolkit of the regulators that is versatile, easy-to-use and can handle complex cause-effect phenomena that are not directly observable or measurable, i.e. latent constructs. In a first application of partial least squares structural equation modeling (PLS-SEM) in financial stress testing, we demonstrate how this technique can be used to explain transmission of systemic risk. We model transmission of systemic risk from shadow banking to the regulated banking sector by a set of indicators (directly measurable variables) that are causes of systemic risk in shadow banking and consequences of systemic risk observed in the regulated banking sector. Procedures followed for predictive model assessment using PLS-SEM are outlined in clear steps for the benefit of those unfamiliar with this technique. Results indicate that around 75% of the variation in systemic risk in the regulated banking sector can be explained by micro and macro-level linkages traced to shadow banking. The path coefficients between the two exogenous latent constructs (i.e. systemic risk in shadow banking separately sourced from micro and macro-level linkages) and the endogenous latent construct (i.e. systemic risk in the regulated banking sector) are statistically significant. Regulators can use the approach illustrated in this article to monitor transmission of systemic risk appreciative of the extent of contagion emanating from micro and macro-level linkages, thus guiding microprudential versus macroprudential regulatory decisions. Skills demonstrated in this article are transferable to any finance topic or discipline where latent constructs are found.