Predictability and diversification benefits of investing in commodity and currency futures

John Cotter, Emmanuel Eyiah-Donkor and Valerio Potì

International Review of Financial Analysis, 2017, vol. 50, issue C, 52-66

Abstract: We re-examine diversification benefits of investing in commodities and currencies by considering a risk-averse investor with mean-variance preferences who exploits the possibility of predictable time variation in asset return means, variances, and covariances. We implement unconditional and conditional efficient portfolio strategies designed to exploit this predictability, together with more traditional and/or ad hoc ones yet hitherto relatively unexplored in this context (including the equally weighted, fixed weight, volatility timing, and reward-to-risk timing strategies). We find that, for all portfolio strategies, commodities and currencies do not improve the investment opportunity set of the investor with an existing portfolio of stocks, bonds and T-bills, and an investment horizon of one month. Our findings, which reverse the conclusions of previous studies that focus on static portfolio strategies, are robust across several performance metrics.

Keywords: Commodity and currency futures; Spanning tests; Predictability; Portfolio strategies; Out-of-sample performance (search for similar items in EconPapers)
JEL-codes: C53 G10 G11 G17 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521916301922
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:50:y:2017:i:c:p:52-66

DOI: 10.1016/j.irfa.2016.12.009

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().