Should Investors Include Commodities in Their Portfolios After All? New Evidence
University of Piraeus
George S. Skiadopoulos
University of Piraeus; Queen Mary, University of London, School of Economics and Finance; City University - Faculty of Finance - Cass Business School
November 26, 2011
Journal of Banking and Finance, Vol. 35, No. 10, 2011
This paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes. First, we revisit the posed question within an in-sample setting by employing mean–variance and non-mean–variance spanning tests. Then, we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out-of-sample performance. Under the in-sample setting, we find that commodities are beneficial only to non-mean–variance investors. However, these benefits are not preserved out-of-sample. Our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures, utility functions and datasets. The results hold even when transaction costs are considered and across various sub-periods. Not surprisingly, the only exception appears over the 2005–2008 unprecedented commodity boom period.
Number of Pages in PDF File: 56
Keywords: Asset allocation, Commodity boom, Commodity futures, Commodity indexes. Spanning, Performance evaluation
JEL Classification: G10, G11, G12Accepted Paper Series
Date posted: August 5, 2010 ; Last revised: November 27, 2011
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