Developing a Model for Measuring and Evaluating the Role of Commodities as Hedging Tools in Investor Portfolios

Objective This study investigated the role of commodities as independent investment tools, determined their interrelationships, explored their behavior within hybrid portfolios, and sought to identify suitable relationships for portfolio selection decisions between commodities and the stock index. The primary goal was to examine the diversification and hedging (safe haven) properties of assets and future commodities in Iran's exchange market compared to stocks during "bull and bear periods of the stock market" and to determine the minimum variance portfolio. Methods This research was applied in purpose and quantitative in methodology. The research approach was deductive (comparative), investigating expected empirical benefits using historical data. The study was theoretically categorized as proof research and, statistically, as a correlational study (econometric models). To this end, regression models of market tests, dynamic conditional correlation (DCC-GARCH), and the Markowitz model (portfolio optimization) were applied to daily data from the stock and commodity markets over 11 years from 2009 to 2020. Results The findings revealed that commodities, on their own, present a high-risk investment. Gold is the only commodity comparable to the stock market, which shares similar returns and volatility. Except for copper, other commodities have significantly higher volatility but lower efficiency than the stock index. Regarding the market test model, results indicated that some commodities had the appropriate hedging ability as a “safe haven” in different stock market regimes (business cycle phases). In portfolio construction, adding a single commodity to a quantitative stock portfolio resulted in low returns, offset by reduced fluctuations. However, the results showed that a “commodities portfolio” outperformed a “single portfolio”. When adding a commodities portfolio or a commodity index to the hybrid portfolio, the stock index still held the largest weight (around 94%), but the average portfolio risk was notably reduced (approximately 1/557), yielding an improved Sharpe ratio. Conclusion According to the findings, investing in commodities is a better option for reaping the benefits of diversification. Furthermore, when making investment decisions, the bull and bear periods of the stock market should be considered, as the findings revealed that business cycle phases are a strong indicator for the tactical allocation of commodities. The results of this study also support the evidence that the behavior of different commodity groups varies significantly. Finally, hedging is not always a safe haven for the stock market, and the reverse is also true.