INFORMATION AVAILABILITY AND COMPETENCE EFFECTS IN COMMODITY INVESTING

A number of studies suggests the availability of information as a possible explanation for the home bias in international stock portfolios. They argue that competence effects play a prominent role in the evaluation of domestic stocks and consequently lead to a bias in stock return expectations. We apply a similar framework to commodities and conduct a survey on expected return distributions of six commodities with varying degrees of media coverage. Our two major findings are: First, the perception of competence in assessing future price developments of a commodity is related to the degree of media coverage of this particular commodity. Second, the shape of expected return distributions is in turn linked to the subjective feeling of competence: There is strong evidence that commodity investments associated with a high perception of competence are expected to generate substantially higher returns. Furthermore, high media coverage may improve the actual forecasting ability. Nevertheless, we show that the feeling of competence is not a good indicator for the true ability to forecast.