Tactical Asset Allocation with Commodity Futures: Implications of Business Cycle and Monetary Policy

33 Pages Posted: 22 Oct 2010 Last revised: 26 Jan 2011

Date Written: May 26, 2010


While Gorton and Rouwenhorst (2005) suggest using business cycle in tactical asset allocation with commodity futures, Jensen et al (2002) suggest using monetary policy in guiding the timing of investment. We investigate whether it is useful to watch both.

We find that clever timing in asset allocation, taking into account both business cycle and monetary policy, does perform better than either the Gorton and Rouwenhorst (2005) or Jensen et al (2002) strategies. This is true in-sample, also true out-of-sample, and significant - as long as one ignores announcement lags. In short, there is indeed an interaction effect between the effects of the two economic variables. However, the benefits from clever timing of one's asset allocation seem much reduced by the late announcement of the business cycle. When stand-alone trading in commodity futures is evaluated, actually, the strategies even underperform buy and hold. When optimal multi-asset portfolios are constructed, the news is not that negative: the combined allocation rule does offer. Still, even then the returns or standardized excess returns are not significantly better. We even find that static diversified portfolios with commodity futures do not have significantly higher returns and Sharpe ratios than static portfolios without commodity futures. In short, the earlier recommendations may have been too optimistic about the role of commodities for financial investment purposes.

Keywords: commodity futures, asset allocation, portfolio diversification, business cycle, monetary policy

Suggested Citation

Nguyen, Van Thi Tuong and Sercu, Piet M. F. A., Tactical Asset Allocation with Commodity Futures: Implications of Business Cycle and Monetary Policy (May 26, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=1695889 or http://dx.doi.org/10.2139/ssrn.1695889

Van Thi Tuong Nguyen (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
0032 16 32 64 62 (Phone)

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

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