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
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, G12
Date posted: August 5, 2010 ; Last revised: November 27, 2011
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