Portfolio diversification and excess comovement in commodity prices

Ian Garrett, Nick Taylor

Research output: Contribution to journalArticlepeer-review


We examine excess comovement in commodity prices and the extent to which this can be explained by the role of commodities in portfolio diversification. We estimate the proportion of investor wealth that should be allocated to commodities in order to maximize expected utility over time and examine whether periods of significant investment in commodities are correlated with excess comovement in commodity prices. Using the Goldman Sachs Commodity Index we find that commodities should form a large part of the optimal portfolios of US investors. However, while this result is robust to the level of risk aversion, it is not robust to the time period considered. We find that commodities only offer statistically significant increases in expected utility during the commodity booms of the early 1970s and the early 1990s. Interestingly, the significance of the commodity weight in the optimal portfolio corresponds to periods when there is also excess comovement in unrelated commodity prices. These findings suggest that commodities per se are treated as an investment class and apparently irrational excess comovement in commodity prices occurs when it is optimal for investors to hold commodities in their portfolios.
Original languageEnglish
Pages (from-to)351-368
Number of pages17
JournalManchester School
Issue number4
Publication statusPublished - Sept 2001


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