Should Commodity Investors Follow Commodities' Prices?
27 Pages Posted: 24 Jul 2018 Last revised: 25 Sep 2019
Date Written: July 4, 2018
Most institutional investors gain access to commodities through diversified index funds, even though mean-reverting prices and low correlation among commodities returns indicate that two-fund separation does not hold for commodities. In contrast to demand for stocks and bonds, we find that, on average, demand for commodities is largely insensitive to risk aversion, with intertemporal hedging demand playing a major role for more risk averse investors. Comparing the optimal strategies of investors who observe only the index to those of investors who observe all commodities, we find that information on commodity prices leads to significant welfare gains, even if trading is confined to the index only.
Keywords: portfolio choice, commodities, filtering, intertemporal hedging, long-run
JEL Classification: G11, G12
Suggested Citation: Suggested Citation