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Can commodities dominate stock and bond portfolios?

  • S.I.: Application of O.R. to Financial Markets
  • Published:
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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.

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Notes

  1. The returns are calculated as the natural logarithm of relative price differences.

  2. For robustness check, we have compared our data from datastream with data from quandl.com and find similar developments of the futures series. The data set should therefore provide reliable results.

  3. For more information on CYD and SDCI see https://www.vescore.com/en-int/what-we-offer/ and https://summerhavenindex.com/sdci/.

  4. There are several different rolling techniques one can apply on futures contracts. Thomson Reuters Datastream provides six different (from Type 0 to Type 5).

  5. http://www.cmegroup.com.

  6. Test for difference in returns yield a t-statistic of 1.1, and the F-test for differences in variance exhibit a F-value of 1.17 with a F-critical of 1.22.

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Acknowledgements

We would like to thank the editor of the journal and the referees for their commitment to assess and improve the paper. We would also thank the discussants at ECOMFIN2016 in Paris.

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Authors and Affiliations

  1. NMBU School of Economics and Business, Norwegian University of Life Sciences, Ås, Norway

    Tom Erik Sønsteng Henriksen

  2. Chemnitz University of Technology, Faculty of Mathematics, Chemnitz, Germany

    Alois Pichler

  3. Department of Industrial Economics and Technology Management, Faculty of Economics and Management, Norwegian University of Science and Technology, Trondheim, Norway

    Sjur Westgaard

  4. NTNU Business School, Faculty of Economics and Management, Norwegian University of Science and Technology, Trondheim, Norway

    Stein Frydenberg

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  1. Tom Erik Sønsteng Henriksen
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Correspondence to Tom Erik Sønsteng Henriksen.

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Henriksen, T.E.S., Pichler, A., Westgaard, S. et al. Can commodities dominate stock and bond portfolios?. Ann Oper Res 282, 155–177 (2019). https://doi.org/10.1007/s10479-018-2996-7

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