Portfolio Optimization of Commodity Futures with Seasonal Components and Higher Moments

We investigate the diversification benefits of combining commodities with a traditional equity portfolio, while considering higher order statistical moments and seasonality. The literature suggests that the in-sample diversification benefits of commodities in portfolio optimization are not preserved out-of-sample. We provide an extensive in-sample and out-of-sample analysis with ten commodities and a stock index using the classical tangency mean-variance model and the maximum Omega ratio model. We show that seasonality in commodity returns should be considered, and leads to significant excess return and increase in Sharpe ratio