Should Commodity Investors Follow Commodities' Prices?

Most long-term investors gain access to commodities through diversified funds, though mean-reverting prices and low correlation among commodities returns suggest that two-fund separation does not hold for commodities.... [ view full abstract ]

Most long-term investors gain access to commodities through diversified funds, though mean-reverting prices and low correlation among commodities returns suggest that two-fund separation does not hold for commodities. Mean-reversion generates an intertemporal-hedging demand for commodities that does not vanish with risk aversion, in contrast to typical models of stock prices. Comparing the utility-maximizing policies of investors observing only the index to those of investors observing all commodities, the welfare gain peaks at risk-neutrality,  maximizing additional returns, and at moderate risk aversion, maximizing intertemporal-hedging gains. Additional information is equivalent to an increase in return of multiple percentage points for typical risk-aversion.