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Do Commodities Add Economic Value in Asset Allocation? New Evidence from Time-Varying Moments

Published online by Cambridge University Press:  14 February 2018

Xin Gao  and
Federico Nardari
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Abstract

We conduct a comprehensive out-of-sample assessment of the economic value adding of commodities in multiasset investment strategies that exploit the predictability of asset return moments. We find that predictability makes the inclusion of commodities profitable even when short selling and high leverage are not permitted. For instance, a mean-variance (non-mean-variance) investor with moderate risk aversion and leverage, rebalancing quarterly, would be willing to pay up to 108 (155) basis points per year after transaction cost for adding commodities to her stock, bond, and cash portfolio. Previous research had reached mixed or even opposite conclusions, especially in an out-of-sample context.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 365 - 393
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Rob Brown, Stephen Brown (the editor), David Feldman, Thijs van der Heijden, Kris Jacobs, Antonio Gargano, Lyndon Moore, Raul Susmel, Jun Tu (the referee), and seminar participants at Monash University, the University of Melbourne, and the University of New South Wales for useful comments and discussions.

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