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On the diversification benefits of commodities from the perspective of euro investors

Author

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  • Belousova, Julia
  • Dorfleitner, Gregor

Abstract

This paper investigates the diversification contribution of several commodities to a portfolio of traditional assets from the perspective of a euro investor. The approach applied in our analysis has high informational content as it differentiates between the sources of the diversification benefits in a statistically significant way. The results indicate that the diversification contribution varies greatly amongst the different commodities. Industrial metals, agriculturals and livestock contribute to the reduction of risk, while energy and precious metals contribute to both the reduction of the level of risk and to the improvement of return. The differentiation between bull and bear markets reveals that investors can enhance the portfolio performance by changing exposure into individual commodities. Investors can benefit from the diversification gains through financial instruments as the diversification gains hold both in the sample of physical commodity and commodity futures. Overall, the results confirm that commodities are valuable investments from the perspective of diversification.

Suggested Citation

  • Belousova, Julia & Dorfleitner, Gregor, 2012. "On the diversification benefits of commodities from the perspective of euro investors," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2455-2472.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:9:p:2455-2472
    DOI: 10.1016/j.jbankfin.2012.05.003
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    References listed on IDEAS

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    Cited by:

    1. Nagayev, Ruslan & Masih, Mansur, 2013. "Should Shariah-compliant investors include commodities in their portfolios? New evidence," MPRA Paper 58851, University Library of Munich, Germany.
    2. repec:eee:empfin:v:44:y:2017:i:c:p:250-269 is not listed on IDEAS
    3. Daskalaki, Charoula & Skiadopoulos, George & Topaloglou, Nikolas, 2017. "Diversification benefits of commodities: A stochastic dominance efficiency approach," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 250-269.
    4. Sensoy, Ahmet & Hacihasanoglu, Erk & Nguyen, Duc Khuong, 2015. "Dynamic convergence of commodity futures: Not all types of commodities are alike," Resources Policy, Elsevier, vol. 44(C), pages 150-160.
    5. Cotter, John & Eyiah-Donkor, Emmanuel & Potì, Valerio, 2017. "Predictability and diversification benefits of investing in commodity and currency futures," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 52-66.
    6. repec:spr:rvmgts:v:12:y:2018:i:1:d:10.1007_s11846-016-0221-0 is not listed on IDEAS
    7. Amélie Charles & Olivier Darné & Jae H. Kim, 2014. "Precious metals shine? A market efficiency perspective," Working Papers hal-01010516, HAL.
    8. repec:eee:ecmode:v:66:y:2017:i:c:p:184-200 is not listed on IDEAS
    9. Lombardi, Marco J. & Ravazzolo, Francesco, 2016. "On the correlation between commodity and equity returns: Implications for portfolio allocation," Journal of Commodity Markets, Elsevier, vol. 2(1), pages 45-57.
    10. repec:eee:finana:v:52:y:2017:i:c:p:316-332 is not listed on IDEAS
    11. Michael Graham & Jarno Kiviaho & Jussi Nikkinen, 2013. "Short-term and long-term dependencies of the S&P 500 index and commodity prices," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 583-592, March.
    12. repec:eee:finana:v:52:y:2017:i:c:p:292-308 is not listed on IDEAS
    13. Bredin, Don & Conlon, Thomas & Potì, Valerio, 2015. "Does gold glitter in the long-run? Gold as a hedge and safe haven across time and investment horizon," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 320-328.
    14. repec:eee:glofin:v:35:y:2018:i:c:p:115-137 is not listed on IDEAS
    15. repec:eee:eneeco:v:66:y:2017:i:c:p:194-204 is not listed on IDEAS
    16. Bessler, Wolfgang & Wolff, Dominik, 2015. "Do commodities add value in multi-asset portfolios? An out-of-sample analysis for different investment strategies," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 1-20.
    17. repec:eee:jrpoli:v:53:y:2017:i:c:p:88-102 is not listed on IDEAS
    18. Antonakakis, Nikolaos & Kizys, Renatas, 2015. "Dynamic spillovers between commodity and currency markets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 303-319.
    19. repec:fau:fauart:v:67:y:2017:i:5:p:396-422 is not listed on IDEAS
    20. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2015. "Will precious metals shine? A market efficiency perspective," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 284-291.
    21. Agyei-Ampomah, Sam & Gounopoulos, Dimitrios & Mazouz, Khelifa, 2014. "Does gold offer a better protection against losses in sovereign debt bonds than other metals?," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 507-521.
    22. Kang, Sang Hoon & McIver, Ron & Yoon, Seong-Min, 2017. "Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets," Energy Economics, Elsevier, vol. 62(C), pages 19-32.
    23. repec:ipg:wpaper:2014-561 is not listed on IDEAS
    24. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Reboredo, Juan Carlos & Wen, Xiaoqian, 2014. "Dependence of stock and commodity futures markets in China: Implications for portfolio investment," Emerging Markets Review, Elsevier, vol. 21(C), pages 183-200.

    More about this item

    Keywords

    Commodities; Asset allocation; Diversification; Spanning test; Step-down procedure;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General

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