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Hedging with commodity futures and the end of normal Backwardation

Jochen Güntner () and Benjamin Karner
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Benjamin Karner: Johannes Kepler University,

No 2020-21, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: Using the S&P GSCI and its five component sub-indices, we show that considering each commodity separately yields nontrivial hedging gains in and out of sample. During 1999–2019, the maximum Sharpe ratio portfolio assigns positive weights to the GSCI Energy, Industrial and Precious Metals, whereas only precious metals enter the optimal portfolio after the financial crisis. In out-of-sample optimizations based on dynamic conditional correlations, a subset of commodity futures excluding the GSCI Agriculture and Livestock outperforms conventional stock-bond portfolios with and without the overall GSCI. We argue that the “normal backwardation” in commodity markets has broken down during our sample period.

Keywords: Commodity futures; Diversification; Hedging; Financial crisis; Normal backwardation (search for similar items in EconPapers)
JEL-codes: C58 G11 G17 Q02 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-fmk and nep-rmg
Note: English
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