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Strategic commodity allocation

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  • Pierre Six

Abstract

This article extends the study of the financialization of commodities (Rouwenhorst and Tang [ Annu. Rev. Financ. Econ ., 2012, 4 , 447-467]) by considering an investment in the term structure of commodity futures prices. Specifically, we analyse the benefits of adding a distant commodity futures contract and/or a spot commodity (near month futures contract) to a portfolio of bonds and stocks in a setting similar to Brennan and Schwartz [The use of treasury bill futures in strategic asset allocation programs. In Worldwide Asset and Liability Modeling , edited by W.T. Ziemba and J.M. Mulvey, pp. 205-230, 1998 (Cambridge University Press: Cambridge)]. Our analysis employs an empirical study that covers the post financial crisis period. We show that the spot commodity considerably improves the value of the portfolio. However, an investment in the whole term structure of futures contracts is optimally achieved through high opposite positions in the spot commodity and distant futures contracts. We find that these extreme calendar spreads can result in an inappropriate investment.

Suggested Citation

  • Pierre Six, 2015. "Strategic commodity allocation," Quantitative Finance, Taylor & Francis Journals, vol. 15(1), pages 131-150, January.
    • Handle: RePEc:taf:quantf:v:15:y:2015:i:1:p:131-150
    DOI: 10.1080/14697688.2014.951386
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    References listed on IDEAS

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    1. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, April.
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    Cited by:

    1. Fouquau, Julien & Six, Pierre, 2015. "A comparison of the convenience yield and interest-adjusted basis," Finance Research Letters, Elsevier, vol. 14(C), pages 142-149.

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