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Research on the Diversification Benefits of Commodity Futures

Author: LiRuiXin
Tutor: HuaRenHai
School: Nanjing University of Finance and Economics
Course: Finance
Keywords: commodity futures portfolio optimizatio Sharpe ratio
CLC: F724.5
Type: Master's thesis
Year: 2013
Downloads: 6
Quote: 0
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Abstract


Commodity futures contracts, are an important investment tool, like stocks andbonds.According to Markowitz Asset Portfolio theory, adding low related asset intothe portfolio can effectively reduce the risk of the portfolio.A lot of foreign researchesfind that commodity futures have such a low correlation with other financial products.Therefore, besides the function of price discovery and hedging, commodity futurescan also withstand the threat of inflation, diversify the risk of portfolio and optimizeasset allocation.Because these functions of commodity futures, foreign investors utilizedcommodity futures in their portfolio to improve the traditional asset allocation inrecent years,and obtained outstanding result. But fewer researchers in China considerthe applications of commodity futures added to the asset portfolio. This paper tries todo a in-depth research on the feasibility of commodities futures added to the assetportfolio based on the China’s capital market.This paper first introduced the development trend of commodity futures in recent10years and the research status of optimization effect of commodity futures at homeand abroad. In the part of empirical analysis on the optimization of commodity futuresin the portfolio, we first obtained the correlation among stock market, bond market,commodity futures market and American stock market, and then analysed thefeasibility of adding commodity futures to a portfolio according to Markowitz AssetPortfolio theory. Through Matlab programming, we calculated the weight of eachasset in the case of different risk-return, and provided investment strategies toinvesters with different risk preferences. In this paper,we found that addingcommodity futures into asset portfolio can effectively increase Sharpe ratio of thecapital market line.In the end, this paper made some suggestions for the development of China’scommodity future markets.

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CLC: > Economic > Trade and Economic > China's domestic trade and economic > Circulation of commodities > Futures Trading
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