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A study of first generation commodity indices: Indices based on financial diversification

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  • Ahn, Jung-Hyun
  • Six, Pierre

Abstract

This study compares first generation, i.e. long-only passive, commodity indices based on financial diversification criteria, such as equal weight, equal risk contribution and global minimum variance, to the main first generation commodity indices used as vehicles for investment, namely the S&P GSCI (GSCI) and the BCOM. The GSCI and the BCOM are mainly computed according to the world individual commodity production. We find that commodity indices based on financial diversification offer better Sharpe ratios, lower volatilities, and lower correlation with bonds and equity. Finally, we provide evidence for a low-volatility anomaly of the commodity market.

Suggested Citation

  • Ahn, Jung-Hyun & Six, Pierre, 2019. "A study of first generation commodity indices: Indices based on financial diversification," Finance Research Letters, Elsevier, vol. 30(C), pages 194-200.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:194-200
    DOI: 10.1016/j.frl.2018.09.013
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    Cited by:

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    2. Al-Yahyaee, Khamis Hamed & Mensi, Walid & Al-Jarrah, Idries Mohammad Wanas & Hamdi, Atef & Kang, Sang Hoon, 2019. "Volatility forecasting, downside risk, and diversification benefits of Bitcoin and oil and international commodity markets: A comparative analysis with yellow metal," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 104-120.

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    More about this item

    Keywords

    Commodity indices; Investment; Diversification; Commodity futures;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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