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The Handbook of Commodity Investing

Book Description

Filled with a comprehensive collection of information from experts in the commodity investment industry, this detailed guide shows readers how to successfully incorporate commodities into their portfolios. Created with both the professional and individual investor in mind, The Handbook of Commodity Investments covers a wide range of issues, including the risk and return of commodities, diversification benefits, risk management, macroeconomic determinants of commodity investments, and commodity trading advisors. Starting with the basics of commodity investments and moving to more complex topics, such as performance measurement, asset pricing, and value at risk, The Handbook of Commodity Investments is a reliable resource for anyone who needs to understand this dynamic market.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Contents
  5. Foreword
  6. Preface
  7. About the Editors
  8. Contributing Authors
  9. PART One: Mechanics of the Commodity Market
    1. CHAPTER 1: A Primer on Commodity Investing
      1. MARKET PARTICIPANTS
      2. COMMODITY SECTORS
      3. COMMODITIES AS AN ASSET CLASS OF THEIR OWN
      4. COMMODITY EXCHANGES
      5. PRICES AT THE COMMODITY FUTURES EXCHANGES
      6. MODELS OF EXPECTED RETURNS
      7. RISK AND PERFORMANCE CHARACTERISTICS
      8. PORTFOLIO OPTIMIZATION WITH COMMODITIES
      9. CONCLUSION
    2. CHAPTER 2: The Pricing and Economics of Commodity Futures
      1. THE RELATIONSHIP BETWEEN FUTURES PRICES AND SPOT PRICES
      2. ECONOMICS OF THE COMMODITY MARKETS: NORMAL BACKWARDATION VERSUS CONTANGO
      3. COMMODITY PRICES COMPARED TO FINANCIAL ASSET PRICES
      4. CONCLUSION
    3. CHAPTER 3: Commodity Futures Investments: A Review of Strategic Motivations and Tactical Opportunities
      1. STRATEGIC MOTIVATION FOR COMMODITY INVESTMENTS
      2. TACTICAL OPPORTUNITIES IN COMMODITY INVESTMENTS
      3. CONCLUSION
    4. CHAPTER 4: Macroeconomic Determinants of Commodity Futures Returns
      1. COMMODITIES AS AN INFLATION HEDGE
      2. DYNAMIC LINKAGES OF MONETARY POLICY AND COMMODITY RETURNS: A VECTOR AUTOREGRESSIVE ANALYSIS
      3. COMMODITIES AND EXCHANGE RATES
      4. COMMODITIES AND THE BUSINESS CYCLE
      5. CONCLUSION
    5. CHAPTER 5: The Relationship Between Risk Premium and Convenience Yield Models
      1. LIMITATION OF RISK NEUTRAL PRICING
      2. TWO BASIC MODELS
      3. TERM STRUCTURE OF COMMODITY PRICES
      4. FUTURES RETURNS
      5. A COMMON DECOMPOSITION OF FUTURES RETURNS
      6. CONCLUSION
      7. APPENDIX
    6. CHAPTER 6: The Optimal Rotation Period of Renewable Resources: Theoretical Evidence from the Timber Sector
      1. PRODUCTION AS A TIME CONSUMING PROCESS
      2. NET PROCEEDS VERSUS COST RETURN
      3. CAPITAL MANAGEMENT IN FORESTRY
      4. REVENUES FINANCE EXPENDITURES
      5. FROM FEUDALISM TO CAPITALISM
      6. LOOKING BACK AND AROUND
      7. CONCLUSION
      8. APPENDIX A
      9. APPENDIX B
  10. PART Two: Performance Measurement
    1. CHAPTER 7: Review of Commodity Futures Performance Benchmarks
      1. SUMMARY OF COMMODITY INDEXES
      2. EMPIRICAL ANALYSIS OF THE COMMODITY BENCHMARK PROBLEM
      3. A SOLUTION FOR HETEROGENEOUS INDEXES
      4. CONCLUSION
    2. CHAPTER 8: Performance Characteristics of Commodity Futures
      1. HISTORICAL RETURNS
      2. RETURN DECOMPOSITION AND DIVERSIFICATION RETURN
      3. CORRELATIONS
      4. INFLATION
      5. RETURNS OVER THE BUSINESS CYCLE
      6. TACTICAL ASSET ALLOCATION
      7. CONCLUSION
    3. CHAPTER 9: Statistical Analysis of Commodity Futures Returns
      1. SOURCES OF RETURN: AN ILLUSTRATION
      2. UNIVARIATE ANALYSIS
      3. MULTIVARIATE ANALYSIS
      4. CONCLUSION
    4. CHAPTER 10: The Diversification Benefits of Commodity Futures Indexes: A Mean-Variance Spanning Test
      1. HOW FINANCIAL ECONOMISTS VIEW ASSET CLASSES
      2. REMOVE THE BORDER
      3. RISK, RETURN, AND DIVERSIFICATION
      4. EMPIRICAL RESULTS
      5. POTENTIAL PITFALLS OF COMMODITY INDEX PERFORMANCE
      6. CONCLUSION
      7. APPENDIX
    5. CHAPTER 11: CTA/Managed Futures Strategy Benchmarks
      1. GROWTH AND BENEFIT OF MANAGED FUTURES
      2. GENERAL DESCRIPTION OF MANAGED FUTURES
      3. CTA INDEX CONSTRUCTION
      4. EMPIRICAL ANALYSIS
      5. ISSUES IN PERFORMANCE MEASUREMENT
      6. CONCLUSION
  11. PART Three: Risk Management
    1. CHAPTER 12: Some Thoughts on Risk Management for Commodity Portfolios
      1. IDEALS AND REALITIES
      2. VARIOUS APPROACHES
      3. THE INFRASTRUCTURE
      4. PORTFOLIO GUIDELINES AND LIMITS
      5. TECHNIQUES
      6. RISK MANAGEMENT ANALYSIS REQUIREMENTS FOR TRADING OPTIONS
      7. CONCLUSION
    2. CHAPTER 13: Effective Risk Management Strategies for Commodity Portfolios
      1. MEAN REVERSION BEHAVIOR OF COMMODITY RETURNS
      2. MARKING THE NET ASSET VALUE
      3. MEASURING EVENT RISKS
      4. STRESS TESTING USING VALUE AT RISK
      5. MEASURING LIQUIDITY RISKS
      6. PERFORMANCE ATTRIBUTION
      7. MITIGATING OPERATIONAL RISKS
      8. CONCLUSIONS
    3. CHAPTER 14: Quantifying Cross-Commodity Risk in Portfolios of Futures Contracts
      1. RISK MANAGEMENT OF COMMODITY FUTURES PORTFOLIOS
      2. A TIME VARYING MODEL OF FORWARD VOLATILITY
      3. A MODEL OF CONTRACT INTERRELATIONSHIPS
      4. A PRACTICAL HEDGING EXAMPLE
      5. CONCLUSION
    4. CHAPTER 15: Incorporating Futures in Commodity Price Forecasts
      1. COMMODITY PRICE DEVELOPMENTS: SOME FACTS
      2. STATIONARITY AND COINTEGRATION
      3. FORECASTING MODELS
      4. ASSESSING FORECAST PERFORMANCE
      5. DATA
      6. RESULTS
      7. CONCLUSION
  12. PART Four: Asset Allocation
    1. CHAPTER 16: Commodity Trading Strategies: Examples of Trading Rules and Signals from the CTA Sector
      1. TECHNICAL ANALYSIS
      2. TREND FOLLOWERS AND MOVING AVERAGES SIGNALS
      3. LIMITS OF MOVING-AVERAGE-BASED TREND-FOLLOWING SYSTEMS
      4. NONTREND FOLLOWERS AND TRADING RANGE SIGNALS
      5. BACK-TESTING AND CALIBRATION
      6. PORTFOLIO CONSTRUCTION
      7. CONCLUSION
    2. CHAPTER 17: How to Design a Commodity Futures Trading Program
      1. TRADE DISCOVERY
      2. TRADE CONSTRUCTION
      3. PORTFOLIO CONSTRUCTION
      4. RISK MANAGEMENT
      5. LEVERAGE LEVEL
      6. UNIQUE CONTRIBUTION TO THE INVESTOR'S OVERALL PORTFOLIO
      7. CONCLUSION
    3. CHAPTER 18: Sources of Alpha in Commodity Investing
      1. COMMODITY FUTURES AS AN ASSET CLASS
      2. RETURN STATISTICS OF COMMODITY FUTURES
      3. ALPHA STRATEGIES IN COMMODITY MARKETS
      4. CONCLUSION
    4. CHAPTER 19: Efficient Frontier of Commodity Portfolios
      1. WHAT TO LOOK OUT FOR
      2. EXPOSURE TO COMMODITIES
      3. DERIVING EFFICIENT COMMODITY PORTFOLIOS
      4. TECHNICAL IMPLEMENTATION OF THE MEAN-CVAR APPROACH
      5. THE EFFICIENT FRONTIER OF COMMODITY PORTFOLIOS
      6. CONCLUSION
    5. CHAPTER 20: Active Management of Commodity Investments: The Role of CTAs and Hedge Funds
      1. BACKGROUND
      2. THE ROLE OF COMMODITIES IN INVESTMENT PORTFOLIOS
      3. PASSIVE COMMODITY INVESTING
      4. ACTIVE COMMODITY INVESTING VIA SPECIALIST CTAs AND HEDGE FUNDS
      5. PORTFOLIO IMPLICATIONS
      6. MACRO FUNDAMENTALS AND ACTIVE MANAGERS AS A HEDGE
      7. CONCLUSIONS
    6. CHAPTER 21: Introducing Alternative Investments in a Traditional Portfolio: The Case of Commodities, Hedge Funds, and Managed Futures
      1. COMMODITIES AS AN INFLATION HEDGE
      2. DISTRIBUTIONAL CHARACTERISTICS OF COMMODITIES
      3. INDEXES USED IN THE OPTIMIZATION
      4. THE EFFECT OF ALTERNATIVE INVESTMENTS ON TRADITIONAL PORTFOLIOS
      5. CONCLUSION
    7. CHAPTER 22: Strategic and Tactical Allocation to Commodities for Retirement Savings Schemes
      1. STRATEGIC ASSET ALLOCATION
      2. STATISTICAL SIGNIFICANCE OF THE PORTFOLIO IMPROVEMENT
      3. TACTICAL ASSET ALLOCATION
      4. CONCLUSION
      5. APPENDIX A: THE OPTIMAL MEAN-VARIANCE PORTFOLIO WITH PENSION LIABILITIES
      6. APPENDIX B: ROBUSTNESS ANALYSIS: DIFFERENT EXPECTED RETURNS
  13. PART Five: Commodity Products
    1. CHAPTER 23: Types of Commodity Investments
      1. DIRECT CASH INVESTMENT
      2. INDIRECT INVESTMENT
      3. CONCLUSION
    2. CHAPTER 24: Commodity Options
      1. COMMODITY OPTIONS MARKETS
      2. HISTORICAL PRICE BEHAVIOR
      3. STOCHASTIC PROCESSES
      4. PRICING OPTIONS
      5. SWING OPTIONS
      6. CONCLUSION
    3. CHAPTER 25: The Pricing of Electricity Forwards
      1. TRADITIONAL FORWARD PRICING
      2. ELECTRICITY FORWARD PRICING
      3. A NUMERICAL APPLICATION
      4. CONCLUSION
      5. APPENDIX A
      6. APPENDIX B
    4. CHAPTER 26: Securitization of Commodity Price Risk
      1. DRIVERS FOR COLLATERALIZED COMMODITY OBLIGATIONS
      2. LEGAL STRUCTURE OF A GENERIC CCO
      3. CONCLUSION
    5. CHAPTER 27: Commodity Trading Advisors: A Review of Historical Performance
      1. THE CISDM CTA INDEXES
      2. PERFORMANCE ANALYSIS OF CTA RETURNS
      3. HISTORICAL CTA RETURNS
      4. CONCLUSION
    6. CHAPTER 28: Catching Future Stars Among Micro-CTAs
      1. CTAs AND THEIR ASSETS
      2. MORTALITY AND SURVIVORSHIP BIAS OF CTAS
      3. DATA AND METHODOLOGY
      4. EMPIRICAL RESULTS
      5. CONCLUSION
    7. CHAPTER 29: A Primer on Energy Hedge Funds
      1. TYPES OF COMMODITY HEDGE FUNDS
      2. RISKS ASSOCIATED WITH ENERGY HEDGE FUNDS
      3. FUND CHARACTERISTICS
      4. RISK AND RETURN CHARACTERISTICS
      5. CONCLUSION
  14. PART Six: Special Classes
    1. CHAPTER 30: An Overview of Commodity Sectors
      1. HARD COMMODITIES: ENERGY
      2. HARD COMMODITIES: METALS
      3. SOFT COMMODITIES
      4. CONCLUSION
    2. CHAPTER 31: A Practical Guide to Gold as an Investment Asset
      1. USES OF GOLD
      2. GOLDEN FUNDAMENTALS
      3. GOLD INVESTMENT PRODUCTS
      4. GOLD MARKET INVESTMENT AND GOLD INSTRUMENTS
      5. GOLD PRICING DYNAMICS
      6. CONCLUSION
    3. CHAPTER 32: The Effect of Gold in a Traditional Portfolio
      1. FACTORS DRIVING GOLD PRICES
      2. GOLD AS A PORTFOLIO CONSTITUENT
      3. CONCLUSION
    4. CHAPTER 33: Fundamental Analysis of the World Silver Market
      1. THE SUPPLY OF SILVER
      2. THE DEMAND FOR SILVER
      3. MARKET BALANCE
      4. HOW TO INVEST IN SILVER
      5. CONCLUSION
    5. CHAPTER 34: Investing in Base Metals
      1. WHAT ARE BASE METALS?
      2. BASE METAL INDUSTRY
      3. MARKET STRUCTURE
      4. INVESTMENT STRATEGIES
      5. CONCLUSION
    6. CHAPTER 35: Electricity Trading in the European Union
      1. MARKETPLACES FOR ELECTRICITY IN EUROPE
      2. SPOT AND FORWARD MARKETS FOR ELECTRICITY
      3. INFLUENCE FACTORS ON MARKET PRICE
      4. HEDGING
      5. CONCLUSION
    7. CHAPTER 36: The Natural Gas Market in the United Kingdom
      1. BASICS
      2. COMMODITY RELATIONSHIPS
      3. PRICE STRUCTURES
      4. CONCLUSION
    8. CHAPTER 37: Emissions Trading in the European Union
      1. BACKGROUND
      2. OPERATIONAL TRADING OF EU ALLOWANCES
      3. CONCLUSION
    9. CHAPTER 38: The Fundamentals of Agricultural and Livestock Commodities
      1. GRAIN
      2. CATTLE
      3. HOGS
      4. CONCLUSION
    10. CHAPTER 39: Fundamental Analysis of the World Sugar Market
      1. PRICE FORECASTING
      2. SUGAR AS AN INVESTMENT
      3. ETHANOL
      4. HOW TO INVEST
      5. CONCLUSION
  15. PART Seven: Technical Analysis
    1. CHAPTER 40: The Profitability of Technical Analysis in Commodity Markets
      1. THE EFFICIENT MARKET HYPOTHESIS
      2. TECHNICAL TRADING SYSTEMS
      3. EMPIRICAL STUDIES
      4. EXPLANATIONS FOR TECHNICAL TRADING PROFITS
      5. CONCLUSION
  16. Index