Should Investors Buy Commodities?

33 Pages Posted: 27 Feb 2015

Date Written: February 26, 2015

Abstract

One reason that investors hold commodities is to receive diversification benefits. However, while an extensive set of existing studies demonstrate diversification benefits when investors hold international stocks or bonds, they are generally silent on the implications of holding commodities. Using an asset pricing framework we investigate the benefits to investors from holding commodities, both individually and in portfolios. Generally, commodity and stock markets are integrated, although there are time-varying benefits to investors that are subject to sample period selection and investment horizon. We show that Asian investors receive positive risk adjusted returns in gold and rice markets but not in any of the other commodity markets investigated. The risk adjusted returns are time-varying: during the Asian Financial Crisis risk adjusted returns were negative -- a penalty for investing in commodities -- whereas during the Global Financial Crisis the reverse was true and investors earned positive excess returns. The time-varying nature of the benefits that arise from diversification in commodities and their breakdown during periods of crisis, highlight the problems that investors may face when using commodities for long term investment in addition to traditional holdings of stocks and bonds.

Keywords: Commodities, Financial Market Integration, International Asset Pricing, Systematic Risk, Market Risk

JEL Classification: F15, F2, F36, G10, G15

Suggested Citation

Batten, Jonathan A. and Szilagyi, Peter G. and Wagner, Niklas F., Should Investors Buy Commodities? (February 26, 2015). Available at SSRN: https://ssrn.com/abstract=2570745 or http://dx.doi.org/10.2139/ssrn.2570745

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Peter G. Szilagyi

EDHEC Business School ( email )

24 Av. Gustave Delory
Roubaix, 59057
France

Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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