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Commodities and portfolio diversification: Myth or fact?

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  • Ruano, Fábio
  • Barros, Victor

Abstract

This study investigates whether commodities yield diversification benefits to stock portfolios for loss-averse investors using a sample of 16 individual futures contracts and one index of commodity futures. We confirm that commodities are extremely sensitive to market economic conditions. While the energy sector performs better under economic expansion periods, precious metals yield diversification benefits at most times. Livestock commodities display a high potential to reduce risk, especially during recessions. The role of commodities is similar during the global financial and European sovereign debt crises. Commodities are also relevant in the uncertain period of 2020–2022, although patterns are changing. During the COVID-19 period, precious metals do not increase performance, while at the beginning of the 2022 war in Eastern Europe, we find a generalized improvement in portfolios that outperforms all the other subperiods. Overall, this is not a myth, as there remains a diversification benefit, albeit a time-dependent one with a decreasing trend.

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  • Ruano, Fábio & Barros, Victor, 2022. "Commodities and portfolio diversification: Myth or fact?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 281-295.
    • Handle: RePEc:eee:quaeco:v:86:y:2022:i:c:p:281-295
    DOI: 10.1016/j.qref.2022.08.003
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    More about this item

    Keywords

    Loss-averse; Commodities; Diversification; Asset allocation models;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G1 - Financial Economics - - General Financial Markets
    • G1 - Financial Economics - - General Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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