The Effects Of Chinese Commodity Futures Indexes On Asset Allocation

This article classifies 9 kinds of commodity futures in emerging Chinese markets into 4 categories,i.e.agricultural products,energy,industrial products and precious metal,roundly investigates their dynamic correlations with Chinese equities and bonds,based on ADCC-GARCH and Markowitz's Mean-Variance theoretical framework,and each of their contribution in asset allocation process.The article finds that,on the contrary to common international experiences,Chinese commodity futures are generally positively correlated with equities all the time.First,it's the other way around international equities and commodities;Second,it suggests that investors could short commodity futures while allocating equity assets in Chinese markets.Further,the article concludes that,equity investors could choose cotton and fuel futures for the purpose of diversification without sacrificing reasonable returns while bond investors enjoy a greater selection of commodity futures in improving their riskadjusted returns.For those already diversified in equities and bonds,they should not allocate in aluminum or coke,at least in recent times.This article gives practical perspective for the rising up of Commodity Trading Advisor in China,especially encouraging CTAs to include bond assets for diversification.