Conditional Correlation and Volatility in Commodity Futures and Traditional Asset Markets

The article studies the conditional correlations between 25 commodity futures and 13 stock and fixed-income indices. Conditional correlations with equity returns fell over time, a sign that commodity futures have become better tools for strategic asset allocation. The correlations between the Samp;P500 and 11 commodities also fell in periods of above average volatility in equity markets. We see this as welcome news to long institutional investors as they need the benefits of diversification most in periods of high volatility in equity markets. Similarly, the results suggest that adding commodity futures to Treasury-bill portfolios reduces risk further in volatile interest rate environments