Strategic Allocation, Asset Pricing and Prior Return Patterns: Evidence from Indian Commodity Market

In this article we employ data for 12 commodities, four commodity indices and one stock market proxy from July 2006 to February 2011 for India. We find that commodities that provide higher average returns also exhibit higher price volatility. The return distributions for commodities as well as for indices do not seem to follow a random walk. Combining gold with stock market index provides large portfolio diversification benefits. Capital Asset Pricing Model (CAPM) seems to be a better descriptor of asset pricing in commodity markets when one uses commodity index instead of stock market index to represent market portfolio. It is further observed that there are no discernible prior return patterns in very short term and short term commodity returns that can be used by investors to develop portfolio trading strategies, as is the case in equity markets. Our findings are relevant for policymakers as well as for market traders. This study contributes to the alternative investment literature for emerging markets.