Hedging Stocks With Commodities Seen as Flawed: Chart of the Day
Commodities track stocks too closely to make them suitable for equity investors seeking to minimize risk, according to Marco J. Lombardi, an economist at the Bank for International Settlements.
“The common lore that commodities should serve as a hedge does not seem to be solidly grounded,” Lombardi and Francesco Ravazzolo, an economist at the Norwegian central bank, wrote in a paper two weeks ago. The research was published by the BIS, which keeps records for the world’s central banks.
The CHART OF THE DAY compares the indicators they used to reach their conclusion, the Standard & Poor’s GSCI Index of commodity prices and the MSCI World Index of stocks in developed countries. The study was based on weekly figures from 1980 to 2012, the time period displayed in the chart, as compiled by Bloomberg.
Correlation between the indexes surged from mid-2008 onward after staying near zero for more than a decade, the paper said. The reading could have been as high as 1 if the S&P GSCI and MSCI World rose and fell in tandem, and as low as minus 1 if they swung in opposite directions.
Investors may have been able to produce higher returns by owning commodities along with stocks than with equities alone, according to Lombardi, who is based in Basel, Switzerland, and Ravazzolo, based in Oslo.
Yet any increase may not have been enough to outweigh the “substantially higher volatility” resulting from the commodity investment, they wrote in the working paper. Their judgment was based on Sharpe ratios, an indicator of returns after adjusting for risk.
To contact the editor responsible for this story: Chris Nagi at email@example.com