CHAPTER 10
The Diversification Benefits of Commodity Futures Indexes: A Mean-Variance Spanning Test
Bernd Scherer, Ph.D.
Managing Director
Global Head of Quantitative Structured Products
Morgan Stanley Investment Management
Li He, Ph.D.
Quantitative Research Analyst
Deutsche Asset Management
It is well known that commodity investment provides diversification benefits to a portfolio. (See, for example, Abanomey and Mathur1; Anson2; Gorton and Rouwenhorst3; Jensen, Johnson, and Mercer4; and the CISDM Research Department.5 Commodity futures tend to have equity-like returns, and are negatively correlated with stocks and bonds. When the returns on bonds or equities are low, the returns on commodity futures might be high. Thus, adding commodities in the investment universe makes it possible to achieve higher returns of the whole portfolio without increasing risks. Furthermore, commodities might help investors hedge against inflation since commodities tend to have higher returns when inflation rises, while bonds and equities tend to perform worse with rising inflation. Investors are therefore getting more interested in the statistical and economic foundations of commodity investing. In this chapter, we investigate whether commodities extend the investment universe for U.S.-based investors. In other words, does the inclusion of commodities into portfolios lead to statistically significant improvements in the efficiency (best risk-return trade-off) of an investor's portfolio?6
The outline ...
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