Spicing up a Portfolio with Commodity Futures: Still a Good Recipe?

The Journal of Alternative Investments, 2017

16 Pages Posted: 17 Apr 2019

See all articles by Robert T. Daigler

Robert T. Daigler

Florida International University (FIU) - Department of Finance

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Leyuan You

Texas State University, San Marcos

Date Written: March 19, 2017

Abstract

We investigate whether employing individual commodity futures provides a superior optimized risk-return strategy relative to an equity portfolio, in spite of recently increasing correlations between commodity and equity markets. We first construct Markowitz mean-variance optimized portfolios of commodity and financial futures contracts within sample. We then evaluate their subsequent out-of-sample performance using various time periods, targeted risk levels, and rebalancing frequencies. These portfolios generally outperform benchmark equity indices, both in terms of return and risk levels. These portfolios also exhibit lower tail risk (reduced potential extreme losses) relative to the equity indices. These findings support the use of commodity futures for both diversification and portfolio optimization purposes and illustrate appropriate application metrics. Moreover, the results are superior to using the commodity index approach emphasized by most previous studies.

Keywords: commodity futures; portfolio optimization; tail risk

JEL Classification: G10; G11; G13

Suggested Citation

Daigler, Robert T. and Dupoyet, Brice and You, Leyuan, Spicing up a Portfolio with Commodity Futures: Still a Good Recipe? (March 19, 2017). The Journal of Alternative Investments, 2017. Available at SSRN: https://ssrn.com/abstract=3355815

Robert T. Daigler

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3325 (Phone)
305-348-4245 (Fax)

Brice Dupoyet (Contact Author)

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

Leyuan You

Texas State University, San Marcos ( email )

601 University Drive
San Marcos, TX 78666-4616
United States
512-245-3215 (Phone)

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