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

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.