Commodity Futures and Strategic Asset Allocation

This chapter analyzes the role of commodities in the process of strategic asset allocation. It emphasizes computing the optimal weighting of commodities relative to the traditional assets in a multiperiod portfolio choice setting and offers some plausible explanations on why commodities are an important asset class beyond the traditional portfolios of stocks and bonds. From the perspective of U.S. investors, the analysis shows that investors have a relatively strong and stable intertemporal hedging demand for commodities for long-term horizons despite their increasingly easy and inexpensive access to the global equity and bond markets. Overall, the results lend support to those institutional investors who believe that commodities are an important asset class and continue to include such assets in their strategic portfolio allocation process.