Predictability and Diversification Benefits of Investing in Commodity and Currency Futures

34 Pages Posted: 2 Mar 2016 Last revised: 26 Aug 2019

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Emmanuel Eyiah-Donkor

Rennes School of Business

Valerio Potì

University College Dublin

Date Written: November 1, 2015

Abstract

We re-examine diversification benefits of investing in commodities and currencies by considering a risk-averse investor with mean-variance preferences who exploits the possibility of predictable time variation in asset return means, variances, and covariances. We implement unconditional and conditional efficient portfolio strategies designed to exploit predictability, together with more traditional ones hitherto explored in this context (including the equally weighted, fixed weight, volatility timing, and reward-to-risk timing strategies). We find that, for all portfolio strategies, commodity and currency futures do not improve the risk-return trade-off of an investor with an existing portfolio of traditional assets (stocks and bonds), and an investment horizon of one-month. Our findings, which reverse the conclusions of previous studies that focus on static portfolio strategies, are robust across several performance metrics.

Keywords: Portfolio choice, Asset classes, Spanning tests, Predictability, Performance evaluation

JEL Classification: C53, G10, G11, G12

Suggested Citation

Cotter, John and Eyiah-Donkor, Emmanuel and Potì, Valerio, Predictability and Diversification Benefits of Investing in Commodity and Currency Futures (November 1, 2015). International Review of Financial Analysis, Vol. 50, 2017, Available at SSRN: https://ssrn.com/abstract=2740470 or http://dx.doi.org/10.2139/ssrn.2740470

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://https://johncotter.org/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Emmanuel Eyiah-Donkor (Contact Author)

Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35000
France

Valerio Potì

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

HOME PAGE: http://https://people.ucd.ie/valerio.poti

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