Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach
58 Pages Posted: 2 Nov 2015 Last revised: 22 Jul 2017
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Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach
Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach
Date Written: June 20, 2017
Abstract
We revisit the question whether commodities should be included in investors' portfolios. We employ for the first time a stochastic dominance efficiency (SDE) approach to construct optimal portfolios with and without commodities and we evaluate their comparative performance. SDE circumvents the necessity to posit a specific utility function to describe investor's preferences and it does not impose distributional assumptions on asset returns. We find that commodities provide diversification benefits both in- and out-of-sample. This evidence is stronger when commodity indices which mimic dynamic commodity trading strategies are used. We explain our results by documenting that commodity markets are segmented from the equity and bond markets.
Keywords: Alternative asset class, Commodity indices, Portfolio choice, Stochastic dominance
JEL Classification: C1, C4, C6, G10, G11
Suggested Citation: Suggested Citation