Hedging Characteristics of Commodity Investment in the Emerging Markets

Investors derive the greatest risk reduction benefit from portfolio diversification by holding

assets with a low co-movement. As correlations between stocks worldwide have been

increasing over time, interest in alternative assets such as commodities is also rising. This

study examines the risk reducing properties of commodity investment from the perspective

of 10 emerging markets from January 1991 through December 2013. Tests of GARCH

dynamic conditional correlation coefficients indicate that commodities are portfolio

diversifiers, but do not provide a significant long-term hedge. In times of extreme stock

market volatility commodities provide a weak safe haven against risk in most countries.

During the 1994-95 Mexican peso crisis, the 1997-98 Asian currency crisis, and the 9/11/01

attack, commodities demonstrate significant safe haven properties. However, commodities

do not offer significant risk reduction in the 2008 global financial crisis and the 2010

European debt crisis.

JEL Codes: G11, G15

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