The Benefits of Commodity Futures: An investigation from the perspective of Swedish and Norwegian Investors

Charlotte Jonson & Alexandra Larsson

Student thesis: Master thesis


Executive Summary: This thesis investigates the benefits of investing in commodity futures as this asset class has become an important and rewarding diversifier in the last few decades. Specifically, our quantitative research is taking the perspective from a Swedish vs. a Norwegian investor who diversifies its domestic stock portfolio with commodity futures. Previous research has been done on the US and the European market but as far as we know, never on the Swedish or Norwegian market. This thesis also diverges from many other studies due to the use of individual commodity futures and not the overall commodity index, GSCI. We depart from the Markowitz mean-variance framework in order to find the optimal portfolio composition of domestic stocks and commodity futures during 1990-2013. Due to the characteristics of commodities, we believe there are patterns in the composition of the optimal portfolios depending on bull and bear market. For that reason, extensive research is done where we divide the 24-years period into smaller sub-periods and investigate if some commodities are better suited in a portfolio during bull vs. bear market. Furthermore, we are interested in how much an investor should allocate to commodities in order to get the highest return to volatility ratio. Finally, we apply four different investment strategies with the hope of creating a strategy superior to holding only the stock portfolio. We find evidence that commodity futures possess beneficial characteristics for an investor. The Sharpe ratio is considerably higher when the portfolio not only consists of domestic stocks but also commodity futures. As Copper, Crude Oil, Soybeans and Cotton seem to be rewarding during bull markets, instead Cocoa, Gold and sometimes Soybeans are well-performing commodities during bear markets. The Swedish investor is recommended to invest 40 percent in commodities (during bull market), which is less than the Norwegian investor as our result shows that 60-80 percent commodities should be included (during bull market). However, the conclusion of which investor that actually benefits the most from commodities diverges. When the four investing strategies are applied and the optimal portfolio is practically used, we do not find the same benefits of commodities which imply that investing in commodities is rather difficult. Strategies based on historical performance do not seem to be superior to holding only the stock portfolio which also is in line with the efficient market hypothesis.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages167