The Effectiveness of Hedging the Swedish Stock Markets Using Commodity Futures Index

Abstract

It is well documented that commodity futures contracts are negatively correlated with equities. Recent years has seen a spike in trading with commodity futures contracts because of the large volume traded and the increasing interest by investors, which have reach a top of 380 billion dollar in April 2011. Using 10 years of monthly time series data we will explore the diversification benefits of hedging equity portfolios in the Swedish stock markets using commodity futures contracts. The equity indices we are using are chosen to represent the different Swedish Markets. We also investigate how diversification gains from using commodity futures contracts in our portfolio, before, during and after the financial crisis. The results strongly support the benefits of hedging the portfolios using commodity futures contracts. We also find that post the financial crisis, the performances of hedging the single equity indices with commodity futures contracts were greater than pre the financial crisis.