Evaluating a Trend-Following Commodity Index for Multi-Period Asset Allocation

The Mt. Lucas index provides a systematic approach for capturing a portion of the return of trend-following commodity traders.

Author(s):

John M. Mulvey

Department of Operations Research and Financial EngineeringBendheim Center for Finance, Princeton University

Shiv Siddhant N. Kaul

Department of Operations Research and Financial EngineeringBendheim Center for Finance, Princeton University

Koray D. Simsek

Assistant Professor of Finance, EDHEC Business SchoolResearch Associate, EDHEC Risk and Asset Management Research Centre

We analyze the Mt. Lucas Index across different historical periods, evaluating its performance within a multi-period asset allocation framework. Our results indicate that the index improves the overall return/risk characteristics of the multi-period asset allocation model. We show that the total return consists of: 1) T-Bill returns on marginable assets, 2) static returns from trend-following futures markets, and 3) rebalancing gains. The importance of the third element is emphasized.

Type: Working paper
Date: le 17/09/2003
Research Cluster : Finance

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