Should Commodity Investors Follow Commodities' Prices?

27 Pages Posted: 24 Jul 2018 Last revised: 25 Sep 2019

See all articles by Paolo Guasoni

Paolo Guasoni

Dublin City University - School of Mathematical Sciences; Boston University - Department of Mathematics and Statistics

Antonella Tolomeo

University of Torino

Gu Wang

Worcester Polytechnic Institute

Date Written: July 4, 2018

Abstract

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

Guasoni, Paolo and Tolomeo, Antonella and Wang, Gu, Should Commodity Investors Follow Commodities' Prices? (July 4, 2018). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 19-8, Available at SSRN: https://ssrn.com/abstract=3207724 or http://dx.doi.org/10.2139/ssrn.3207724

Paolo Guasoni

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Antonella Tolomeo

University of Torino ( email )

Corso Unione Sovietica 218/bis
Torino, Turin - Piedmont 10134
Italy

Gu Wang (Contact Author)

Worcester Polytechnic Institute ( email )

100 Institute Road
Worcester, MA 01609
United States

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