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Strategic asset allocation and intertemporal demands: with commodities as an asset class

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  • Su, Yongyang
  • Lau, Marco Chi Keung

Abstract

This paper analyzes the role of commodities in the process of strategic asset allocation, with an attempt of computing the weight of commodities relative to traditional assets in a multi-period portfolio choice problem and understanding the economic interpretations to its importance. We find U.S. investors have a significantly stable intertemporal hedging demand for commodities in the long horizons, even when they have access to foreign equity markets, for example, foreign stock market. Our results provide support to institutional investors attempting to include commodities into their strategic asset allocation decision.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26337.

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Date of creation: 01 Oct 2010
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Handle: RePEc:pra:mprapa:26337

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Keywords: strategic asset allocation; portfolio choice; hedging demand; commodities; commodity futures;

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References

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  1. Gary Gorton & K. Geert Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," NBER Working Papers 10595, National Bureau of Economic Research, Inc.
  2. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296942, October.
  3. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
  4. John Y. Campbell & Luis M. Viceira, 1996. "Consumption and Portfolio Decisions When Expected Returns are Time Varying," NBER Working Papers 5857, National Bureau of Economic Research, Inc.
  5. John Y. Campbell & Yeung Lewis Chan & Luis M. Viceira, 2001. "A Multivariate Model of Strategic Asset Allocation," NBER Working Papers 8566, National Bureau of Economic Research, Inc.
  6. Norman Strong & Xinzhong Xu, 2003. "Understanding the Equity Home Bias: Evidence from Survey Data," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 307-312, May.
  7. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  8. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc.
  9. Barron, John M. & Ni, Jinlan, 2008. "Endogenous asymmetric information and international equity home bias: The effects of portfolio size and information costs," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(4), pages 617-635, June.
  10. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  11. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(8-9), pages 1377-1403, June.
  12. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 375-421, December.
  13. Bhamra, Harjoat S. & Uppal, Raman, 2005. "The Role of Risk Aversion and Intertemporal Substitution in Dynamic Consumption-Portfolio Choicewith Recursive Utility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5020, C.E.P.R. Discussion Papers.
  14. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 225-264, 02.
  15. Balduzzi, Pierluigi & Lynch, Anthony W., 1999. "Transaction costs and predictability: some utility cost calculations," Journal of Financial Economics, Elsevier, Elsevier, vol. 52(1), pages 47-78, April.
  16. Lynch, Anthony W., 2001. "Portfolio choice and equity characteristics: characterizing the hedging demands induced by return predictability," Journal of Financial Economics, Elsevier, Elsevier, vol. 62(1), pages 67-130, October.
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