A truly market-value weighted commodity index

Michael Ludwig, Herbert G. Mayer, Andreas W. Rathgeber (), Christina Spriegel and Florian Vogg
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Michael Ludwig: University of Augsburg
Herbert G. Mayer: University of Augsburg
Andreas W. Rathgeber: University of Augsburg
Christina Spriegel: University of Augsburg
Florian Vogg: University of Augsburg

Journal of Asset Management, 2017, vol. 18, issue 3, No 5, 222-242

Abstract: Abstract Commodity indices play a central role in passive commodity investing. However, a closer look at commodity indices reveals huge differences in construction and weighting. For stock market indices on the other side, weighting is generally based on the market capitalization of an asset, according to the capital market theory. In contrast to this sound theoretical and practicable basis for stocks, there is a serious deficiency in commodity indexation. Therefore, in line with the classical capital market theory we present a novel approach to determine the “total investable amount” of commodities, which is the essential requirement for market capitalization based commodity indexation. In addition, we show a comprehensive model application: according to the proposed index weighting, energy allocation is significantly undervalued in existing index compositions, whereas metals and soft commodities are overvalued. Additionally, our results show that a market capitalization weighted commodity index offers very attractive risk-return characteristics for investors, compared to existing commodity indices.

Keywords: commodities; CAPM; indexation; portfolio management; commodity index (search for similar items in EconPapers)
JEL-codes: G10 G11 G15 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1057/s41260-016-0038-z

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