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Abstract
Investors seeking yield in difficult market conditions are increasingly considering “alternative” asset classes. These include commodities, which are mostly accessed through commodity futures. In this article, Skiadopoulos examines the evidence in the finance literature regarding three major issues that arise in treating commodity futures as investment assets. The first question is how much diversification benefit is gained through commodity futures? Much of the reported evidence suffers from methodological problems, such as failure to examine out-of-sample performance or to take account of the transactions costs imposed by the frequent rollover of expiring futures contracts. A second question is to what extent our familiar factor models for equities can be applied to commodity returns. The answer so far is that finding dependable common factors is not easy. Third, given the regulatory changes underway in Washington and elsewhere, he considers the evidence on how margins and margin changes affect futures markets. Overall, the article raises important questions about the use of commodity futures as an asset class in traditional investment portfolios, and shows that the answers available in the literature are less supportive than one might have liked.
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