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Can commodities dominate stock and bond portfolios?

Author

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  • Tom Erik Sønsteng Henriksen

    (Norwegian University of Life Sciences)

  • Alois Pichler

    (Chemnitz University of Technology, Faculty of Mathematics)

  • Sjur Westgaard

    (Norwegian University of Science and Technology)

  • Stein Frydenberg

    (Norwegian University of Science and Technology)

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 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% stock and 40% 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.

Suggested Citation

  • Tom Erik Sønsteng Henriksen & Alois Pichler & Sjur Westgaard & Stein Frydenberg, 2019. "Can commodities dominate stock and bond portfolios?," Annals of Operations Research, Springer, vol. 282(1), pages 155-177, November.
    • Handle: RePEc:spr:annopr:v:282:y:2019:i:1:d:10.1007_s10479-018-2996-7
    DOI: 10.1007/s10479-018-2996-7
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    References listed on IDEAS

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    Cited by:

    1. Massimo Guidolin & Manuela Pedio, 2021. "Forecasting commodity futures returns with stepwise regressions: Do commodity-specific factors help?," Annals of Operations Research, Springer, vol. 299(1), pages 1317-1356, April.
    2. Alois Pichler, 2024. "Higher order measures of risk and stochastic dominance," Papers 2402.15387, arXiv.org.
    3. Alois Pichler, 2024. "Connection between higher order measures of risk and stochastic dominance," Computational Management Science, Springer, vol. 21(2), pages 1-28, December.
    4. Nguyen, Duc Khuong & Topaloglou, Nikolas & Walther, Thomas, 2020. "Asset Classes and Portfolio Diversification: Evidence from a Stochastic Spanning Approach," MPRA Paper 103870, University Library of Munich, Germany.
    5. Gagnon, Marie-Hélène & Manseau, Guillaume & Power, Gabriel J., 2020. "They're back! Post-financialization diversification benefits of commodities," International Review of Financial Analysis, Elsevier, vol. 71(C).
    6. Syed Kumail Abbas Rizvi & Bushra Naqvi & Nawazish Mirza, 2022. "Is green investment different from grey? Return and volatility spillovers between green and grey energy ETFs," Annals of Operations Research, Springer, vol. 313(1), pages 495-524, June.
    7. Massimo Guidolin & Manuela Pedio, 2022. "Switching Coefficients or Automatic Variable Selection: An Application in Forecasting Commodity Returns," Forecasting, MDPI, vol. 4(1), pages 1-32, February.
    8. Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Hasnaoui, Amir & Shao, Xuefeng, 2022. "Going beyond sustainability: The diversification benefits of green energy financial products," Energy Economics, Elsevier, vol. 111(C).
    9. Hachmi Ben Ameur & Zied Ftiti & Waël Louhichi, 2022. "Revisiting the relationship between spot and futures markets: evidence from commodity markets and NARDL framework," Annals of Operations Research, Springer, vol. 313(1), pages 171-189, June.
    10. Xu, Peng, 2024. "Testing out-of-sample portfolio performance using second-order stochastic dominance constrained optimization approach," International Review of Financial Analysis, Elsevier, vol. 95(PA).

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