Portfolio Diversification and Excess Comovement in Commodity Prices.
We examine excess comovement in commodity prices and the extent to which this can be explained by the role of commodities in portfolio diversification. We estimate the proportion of investor wealth that should be allocated to commodities in order to maximize expected utility over time and examine whether periods of significant investment in commodities are correlated with excess comovement in commodity prices. Using the Goldman Sachs Commodity Index we find that commodities should form a large part of the optimal portfolios of US investors. However, while this result is robust to the level of risk aversion, it is not robust to the time period considered. We find that commodities only offer statistically significant increases in expected utility during the commodity booms of the early 1970s and the early 1990s. Interestingly, the significance of the commodity weight in the optimal portfolio corresponds to periods when there is also excess comovement in unrelated commodity prices. These findings suggest that commodities per se are treated as an investment class and apparently irrational excess comovement in commodity prices occurs when it is optimal for investors to hold commodities in their portfolios. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester
Year of publication: |
2001
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Authors: | Garrett, Ian ; Taylor, Nick |
Published in: |
Manchester School. - School of Economics, ISSN 1463-6786. - Vol. 69.2001, 4, p. 351-68
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Publisher: |
School of Economics |
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