"Commodities and Equities: A Market of One?"Commodities Retain Their Diversification Role
A CFTC Study ISSUE 701 | JAN 2008

Amidst a sharp rise in commodity investing, many have asked whether commodities nowadays move in sync with traditional financial assets. The Commodity Futures Trading Commission's (CFTC) Office of the Chief Economist recently released a study that examines the relationship between returns on benchmark commodity and equity investments. Researchers Bahattin Büyüksahin, Michael S. Haigh and Micheal Robe provided evidence that the relationship between the prices of, and the returns on, investable commodity and U.S. equity indices has not changed significantly in the last 15 years. There was little statistical evidence that daily, weekly, or monthly returns on commodities and equities have been moving in sync.

Researchers also found no evidence of a secular increase in co-movement between the returns on commodity and equity investments during periods of extreme returns. In sum, commodity markets seem to have retained their role as a portfolio diversification tool.

"Our study shows that the commodities markets are very independent markets," said CFTC Chief Economist Jeff Harris, in a release. "The study reinforces the notion that it is the fundamentals, such as weather, geopolitical forces and supply/demand that continue to drive commodity futures markets."

The study examines a 17-year period (from 1991 to present) that includes the decade before the commodity investment boom, an economic recession, and the commodity price boom.

Read the full report.



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