Volatility and correlation timing: The role of commodities

摘要

This paper examines the role of commodities from the perspective of dynamic asset allocation. We model conditional second moments of stock, bond, and commodity futures and examine their impact on the portfolio choice decision of a risk-averse investor in a mean-variance framework. Findings suggest that adding commodities in the opportunity set enhances portfolio risk-return characteristics and offers diversification benefits. Moreover, there is substantial economic value in both volatility and correlation timing strategies. Results are robust across various subperiods and rebalancing strategies: alternative correlation dynamics specifications, short-sale constraints, and transaction costs under both in- and out-of-sample settings.