Mongolian mineral export basket risk: A Portfolio theory approach

This paper explores one of the most prominent contemporary macroeconomic risks many commodity-exporting countries are facing today at the stage of their development and provides recommendations to reduce them. Uncertainty of mineral export commodities' price fluctuations affect instability in export earnings and lead to fiscal and balance of payments deficits. However, for the country that depends on a basket of commodities, the volatility can be moderated if there is so-called a portfolio effect; that is if price fluctuations of such commodities offset with each other. In this paper, minerals are considered as risky assets to apply the Modern Portfolio Theory (MPT) and Mongolian mineral export basket is studied as a case study. In 2018, the export revenue share of Mongolian mineral export commodities has reached 87 per cent of total export. Especially during the last few years, coal, one of the most price volatile commodity, is dominating in its total export basket. As a result of this paper, there is a little room to improve the current export mix by adjusting the value weight of each commodity according to their contribution to overall portfolio risk and return.