Advertisement

Journal of Asset Management

, Volume 18, Issue 3, pp 222–242 | Cite as

A truly market-value weighted commodity index

  • Michael Ludwig
  • Herbert G. Mayer
  • Andreas W. Rathgeber
  • Christina Spriegel
  • Florian Vogg
Original Article
  • 51 Downloads

Abstract

Commodity indices play a central role in passive commodity investing. However, a closer look at commodity indices reveals huge differences in construction and weighting. For stock market indices on the other side, weighting is generally based on the market capitalization of an asset, according to the capital market theory. In contrast to this sound theoretical and practicable basis for stocks, there is a serious deficiency in commodity indexation. Therefore, in line with the classical capital market theory we present a novel approach to determine the “total investable amount” of commodities, which is the essential requirement for market capitalization based commodity indexation. In addition, we show a comprehensive model application: according to the proposed index weighting, energy allocation is significantly undervalued in existing index compositions, whereas metals and soft commodities are overvalued. Additionally, our results show that a market capitalization weighted commodity index offers very attractive risk-return characteristics for investors, compared to existing commodity indices.

Keywords

commodities CAPM indexation portfolio management commodity index 

JEL Classification

G10 G11 G15 

Notes

Acknowledgements

This paper has already been presented—among others—at the following conferences: The 21 Annual Conference Multinational Finance Society (MFS), 2014, Prague, Czech Republic, the Annual Conference of the British Accounting & Finance Association (BAFA), 2016, Bath, England 2015. Furthermore, the authors would like to thank Martin Wallmeier, Stefan Stöckl, Sheraz Ahmed, as well as our anonymous referees for their valuable comments and suggestions.

References

  1. Amenc, N., Goltz, F. and Le Sourd, V. (2006) Assessing the Quality of Stock Market Indices. EDHEC Risk & Asset Management Research Centre Publication.Google Scholar
  2. Amenc, N., Goltz, F. and Le Sourd, V. (2009) The Performance of characteristics-based indices. European Financial Management 15(2): 241–278.CrossRefGoogle Scholar
  3. Amenc, N., Goltz, F., Martellini, L. and Retkowsky, P. (2010) Efficient Indexation: An Alternative to Cap-Weighted Indices. EDHEC-Risk Institute Publication.Google Scholar
  4. Arnott, R.D., Hsu, J.C. and Moore, P. (2005) Fundamental Indexation. The Financial Analysts Journal 60(2): 83–99.CrossRefGoogle Scholar
  5. Arnott, R.D., Kalesnik, V., Moghtader, P. and Scholl, C. (2010) Beyond cap-weight: the search for efficient beta. Journal of Indexes (January-February): 16–29.Google Scholar
  6. Basu, A. K., Forbes, B. (2014) Does fundamental indexation lead to better risk-adjusted returns? New evidence from australian securities exchange. Accounting and Finance 54(3): 699–728.CrossRefGoogle Scholar
  7. Broby, D. (2007) A Guide to Equity Index Construction. London: Risk Books.Google Scholar
  8. Broby, D. (2011) Equity index construction. The Journal of Index Investing 2(2): 36–39.CrossRefGoogle Scholar
  9. Cochrane, J.H. (2011) Presidential address: discount rates. The Journal of Finance 66(4): 1540–6261.CrossRefGoogle Scholar
  10. Damodaran, A. (2001) Corporate Finance: Theory and Practice. Hoboken, NJ: Wiley.Google Scholar
  11. Doyle, E., Hill, J., and Jack, I. (2007) Growth in Commodity Investment: Risks and Challenges for Commodity Market Participants. Financial Services Authority.Google Scholar
  12. Fama, E.F., French, K.R. (1997) Industry costs of equity. Journal of Financial Economics 43(2): 153–193.CrossRefGoogle Scholar
  13. FAOSTAT (2015) Methods & standards. http://faostat3.fao.org/mes/glossary/E, accessed on 08 August 2015, 13:00.
  14. Fisher, G.S., Shah, R., Titman, S. (2015) Decomposing Fundamental Indexation. Working paper.Google Scholar
  15. Goldman Sachs. (2015) S&P GSCI commodity index approach. http://www.goldmansachs.com/what-we-do/securities/products-and-business-groups/products/gsci/approach.html, accessed 15 June 2015.
  16. Grinold, R. (1992) Are benchmark portfolios efficient? Journal of Portfolio Management 19(1): 34–40.CrossRefGoogle Scholar
  17. Hartwick, J.M. (1977) Intergenerational equity and the investing of rents from exhaustible resources. The American Economic Review 67(5): 972–974.Google Scholar
  18. Haugen, R. and Baker, N. (1991) The efficient market inefficiency of capitalization-weighted stock portfolios. Journal of Portfolio Management 17(3): 35–40.CrossRefGoogle Scholar
  19. Hotelling, H. (1931) The economics of exhaustible resources. Journal of Political Economy 39(2): 137–175.CrossRefGoogle Scholar
  20. Hsu, J.C. (2006) Cap-weighted portfolios are sub-optimal portfolios. Journal of Investment Management 4(3): 1–10.Google Scholar
  21. Lide, D.R. (ed.) (2005) CRC Handbook of Chemistry and Physics, Section 14, Geophysics, Astronomy, and Acoustics; Abundance of Elements in the Earth’s Crust and in the Sea. Boca Raton: CRC Press.Google Scholar
  22. McKelvey, V.E. (1974). Potential mineral reserves. Resources Policy 1(2): 75–81.CrossRefGoogle Scholar
  23. Metal Radar. (2013) London metal exchange – history and prices of LME copper. http://www.metalradar.com/copper-lme, accessed 26 November 2013.
  24. Perold, A.F. (2007) Fundamentally flawed indexing. The Financial Analysts Journal 63(6): 31–37.CrossRefGoogle Scholar
  25. Rogers. (2015) The RICI. http://www.rogersrawmaterials.com/home.asp, accessed 15 June 2015.
  26. Rosenau-Tornow, D., Buchholz, P., Riemann, A. and Wagner, M. (2009) Assessing the long-term supply risks for mineral raw materials—a combined evaluation of past and future trends. Resources Policy 34(4): 161–175.CrossRefGoogle Scholar
  27. Slade, M.E. (1982) Trends in natural-resource commodity prices: an analysis of the time domain. Journal of Environmental Economics and Management 9(2): 122–137CrossRefGoogle Scholar
  28. Solow, R.M. (1974) The economics of resources or the resources of economics. The American Economic Review 64(2): 1–14.Google Scholar
  29. Southard J. and Bond, B. (2003) Intelligent indices – the scientific approach to money management. Journal of Indices (Fourth Quarter).Google Scholar
  30. Thomson Reuters. (2013) Corecommodity CRB index calculation supplement. http://thomsonreuters.com/content/…/rulebook-crb-2013-08-22.pdf.

Copyright information

© Macmillan Publishers Ltd 2017

Authors and Affiliations

  • Michael Ludwig
    • 2
  • Herbert G. Mayer
    • 1
  • Andreas W. Rathgeber
    • 1
  • Christina Spriegel
    • 2
  • Florian Vogg
    • 2
  1. 1.Institute of Materials Resource ManagementUniversity of AugsburgAugsburgGermany
  2. 2.Research Center Finance & Information ManagementUniversity of AugsburgAugsburgGermany

Personalised recommendations