Conditional Return Correlations between Commodity Futures and Traditional Assets

The article studies the temporal variations in the conditional return correlations between commodity futures and traditional asset classes (global stock and fixed-income indices).

Author(s):

James Chong

California State University, Northridge, USA

Joelle Miffre

PhD, Professor of Finance, EDHEC Business School

We reveal that the conditional correlations between commodity futures and S&P500 returns fell over time, a sign that commodity futures have become better tools for strategic asset allocation. The correlations with equity returns also fell in periods of above average volatility in equity markets. We see this as welcome news to long institutional investors as they need the benefits of diversification most in periods of high volatility in equity markets. Similarly, falls in return correlations between commodity futures and Treasury-bills go hand in hand with rises in short-term interest volatility, suggesting that adding commodity futures to Treasury-bill portfolios reduces risk further in volatile interest rate environments.

Type: Working paper
Date: le 02/04/2008
Research Cluster : Finance

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