This article investigates the potential for portfolio diversification benefits of commodity futures in the Indian context. For this purpose, we have estimated dynamic conditional correlations (DCC) between returns of four commodity futures indices and traditional asset class indices such as stock index, long-term bond index and Treasury bill index, separately for the pre-crisis and crisis period using the DCC-GARCH model and daily data ranging from June 2005 to September 2011. Empirical results reveal that there exist very low dynamic conditional correlations between commodity futures indices returns and traditional asset indices returns, an evidence illustrating the potential for portfolio diversification benefits of commodity futures. Commodity futures become more segmented from the traditional asset market; thus they can be effectively used for strategic asset allocation. Further, the conditional correlation between agriculture commodity future returns with long-run and short-run bond returns declined during the crisis period. Similarly, the conditional correlations of commodity futures indices returns (agriculture, energy and metal) with the stock index declined in periods of high volatility in the equity markets. These two findings indicate that the diversification benefits of commodity futures are most realized when the risks in traditional asset markets rise.
The currency equivalent (CE) monetary aggregates are interpreted as aggregation theoretic money stock measures by Rotemberg et al. ( 1995 ), Barnett ( 1991 ) and Kelly ( 2009 ) and are far more superior to simple sum aggregates as a policy variable. In this context, the components of four official measures of monetary constructs—M1, M2, M3 and L1—are used to construct monthly CE monetary aggregates for the period from April 1993 to June 2009. Quarterly estimates of CE aggregates are also obtained by taking quarterly averages of monthly aggregates. The empirical evidences in terms of information content, velocity behaviour and cyclical behaviour show that there is a potential gain of using CE aggregates as compared to their sum counterparts in applications of policy interest. JEL Classification: C43 E49
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