Can commodities dominate stock and bond portfolios?

Abstract

In this article we discuss whether commodities should be included as an asset class when establishing portfolios. By investigating second order stochastic dominance relations, we find that the stock and bond indices used tend to dominate the individual commodities. We further study if we can find a combination of stocks, bonds and commodities that dominate others. Compared to a 60 percent stock and 40 percent bond portfolio mix, portfolios consisting of long positions in gold futures and two different actively managed indices are the only commodity investments to be included as long positions in a stock/ bond portfolio. The results should be of interest for fund managers and traders that seek to improve their risk-return trade off compared to the traditional 60/ 40 portfolio.

Switching Coefficients or Automatic Variable Selection: An Application in Forecasting Commodity Returns

“…Therefore, in this section, we perform an additional OOS test, in the form of a recursive mean-variance (MV) asset allocation exercise that uses forecasts from the range of predictive models entertained in Section 4 to compute optimal portfolio weights and proceeds to find their implied realized performances. Such an exercise appears to be particularly sensible in light of the growing interest by investors in including commodities in their portfolios because of their diversification benefits (see, e.g., Chong and Miffre [59], Lombardi and Ravazzolo [60], Henriksen et al [61]), although our primary goal is not to re-assess whether the inclusion of commodities in an otherwise standard portfolio generates economic value.…”

Revisiting the relationship between spot and futures markets: evidence from commodity markets and NARDL framework

“…Financial instruments (derivatives, futures contracts, etc.) are known to have a positive effect on price discovery and the efficiency of resource allocation (Chan 1992;Schwarz et al 1994;Henriksen et al 2019). However, they might be sources of anomalies.…”

Is green investment different from grey? Return and volatility spillovers between green and grey energy ETFs

“…The literature has been surprisingly non-focused on the relationship between green energy and equities or bonds despite acknowledging green energy as a rising financial asset with a promising future potential and an asset class alternative to grey energy (Miralles-Quirós & Miralles-Quirós, 2019). It is also surprising, mainly when there is a parallel literature stream that studies the hedging and diversification benefits of green energy for a stock-bond portfolio [ (Bessler & Wolff, 2015), (Rezec & Scholtens, 2017), (Miralles-Quirós et al, 2018), (Schmidt, 2019), (Henriksen et al, 2019), (Rehman & Vo, 2020), (Saeed et al, 2020)]. We strongly believe that the evidence on markets' connectedness and spillovers in the green energy market may have important implications for hedging and portfolio diversification, yet the studies explicitly exploring the return and volatility spillover among green energy and traditional asset classes remained missing.…”