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Portfolio Diversification in Extreme Environments: Are There Benefits from Adding Commodity Future Indices?

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  • Bala Batavia
  • Nandakumar Parameswar
  • Cheick Wagué

Abstract

Diversifying into commodity futures indices to improve risk-return trade-offs had seemed an inviting prospect a couple of decades ago, due to the increasing correlations between equities themselves and the stable low or negative correlations they exhibited with commodities. But there is a view gaining ground now that the benefits of stock portfolio diversification into commodities have died out due to further changes in the correlation matrices, particularly occurring in times of extreme events. This paper readdresses the aforesaid issue for the period 1999-2010, disaggregated into periods so as to bracket bull and bear phases with large changes in returns. Data for the most important equity and commodity indices are used. One interesting finding is that the role of commodities in optimum portfolio diversification may be more relevant in bear phases.

Suggested Citation

  • Bala Batavia & Nandakumar Parameswar & Cheick Wagué, 2012. "Portfolio Diversification in Extreme Environments: Are There Benefits from Adding Commodity Future Indices?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 33-48.
    • Handle: RePEc:ers:journl:v:xv:y:2012:i:3:p:33-48
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    References listed on IDEAS

    as
    1. Cheung, C. Sherman & Miu, Peter, 2010. "Diversification benefits of commodity futures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 451-474, December.
    2. Demidova-Menzel, Nadeshda & Heidorn, Thomas, 2007. "Commodities in asset management," Frankfurt School - Working Paper Series 81, Frankfurt School of Finance and Management.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Commodity Futures; Equity Markets; Sharpe Ratios; Frontier Equity; Optimum Portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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