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A truly market-value weighted commodity index

Author

Listed:
  • Michael Ludwig

    (University of Augsburg)

  • Herbert G. Mayer

    (University of Augsburg)

  • Andreas W. Rathgeber

    (University of Augsburg)

  • Christina Spriegel

    (University of Augsburg)

  • Florian Vogg

    (University of Augsburg)

Abstract

Commodity indices play a central role in passive commodity investing. However, a closer look at commodity indices reveals huge differences in construction and weighting. For stock market indices on the other side, weighting is generally based on the market capitalization of an asset, according to the capital market theory. In contrast to this sound theoretical and practicable basis for stocks, there is a serious deficiency in commodity indexation. Therefore, in line with the classical capital market theory we present a novel approach to determine the “total investable amount” of commodities, which is the essential requirement for market capitalization based commodity indexation. In addition, we show a comprehensive model application: according to the proposed index weighting, energy allocation is significantly undervalued in existing index compositions, whereas metals and soft commodities are overvalued. Additionally, our results show that a market capitalization weighted commodity index offers very attractive risk-return characteristics for investors, compared to existing commodity indices.

Suggested Citation

  • Michael Ludwig & Herbert G. Mayer & Andreas W. Rathgeber & Christina Spriegel & Florian Vogg, 2017. "A truly market-value weighted commodity index," Journal of Asset Management, Palgrave Macmillan, vol. 18(3), pages 222-242, May.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:3:d:10.1057_s41260-016-0038-z
    DOI: 10.1057/s41260-016-0038-z
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    References listed on IDEAS

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    More about this item

    Keywords

    commodities; CAPM; indexation; portfolio management; commodity index;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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