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Can commodities dominate stock and bond portfolios?

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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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    Cited by:

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    3. 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.
    4. 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).
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    6. 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.
    7. 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).

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