Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach

58 Pages Posted: 2 Nov 2015 Last revised: 22 Jul 2017

See all articles by Charoula Daskalaki

Charoula Daskalaki

University of Crete, Department of Economics

George S. Skiadopoulos

University of Piraeus, Department of Banking and Financial Management; Queen Mary, University of London, School of Economics and Finance

Nikolas Topaloglou

Athens University of Economics and Business

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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

Daskalaki, Charoula and Skiadopoulos, George and Skiadopoulos, George and Topaloglou, Nikolas, Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=2684842 or http://dx.doi.org/10.2139/ssrn.2684842

Charoula Daskalaki

University of Crete, Department of Economics ( email )

Rethymno, Crete GR-74100
Greece

George Skiadopoulos (Contact Author)

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://https://sites.google.com/view/george-skiadopoulos

Nikolas Topaloglou

Athens University of Economics and Business ( email )

76, Patision street
Athens, GR10434
Greece

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