Strategic and Tactical Roles of Enhanced Commodity Indices

Authors


  • The authors thank an anonymous referee and the editor, Robert Webb, for providing many valuable comments that helped us significantly to improve the paper. We also benefited from discussions with Katja Anoniemi, Amir Alizadeh, Andros Gregoriou and Jerry Coakley. The outstanding research assistance of Adrian Fernandez-Perez is gratefully acknowledged. The views expressed in this article do not necessarily reflect those of Renaissance Securities.

Correspondence author, EDHEC Business School, 393 Promenade des Anglais, 06202 Nice, France. Tel: +33 (0)4 93 18 32 55, Fax: + 33 (0)4 93 83 08 10, e-mail: Joelle.Miffre@edhec.edu

Abstract

This article formally compares two traditional long-only commodity indices, Standard & Poor's Goldman Sachs Commodity Index (S&P-GSCI) and Dow Jones-UBS Commodity Index (DJ-UBSCI), with their enhanced versions that exploit signals based on contract maturity, momentum, and term structure. The enhanced indices are found to be useful for tactical asset allocation. With alphas ranging from 2.77% to 5.49% per annum, the maturity-enhanced indices offer the best abnormal performance after accounting for liquidity risk. Momentum and term structure enhancements also earn a positive, albeit smaller, alpha of 2.10% per annum on average. All the enhanced indices are found to have comparable effectiveness for risk diversification and inflation hedging as their traditional counterparts, making them useful for strategic asset allocation.

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