Abstract
This study assesses the inflation-hedging properties of commodity futures across three dimensions: investment horizon, market and time. Measured over the full sample period (1970 – 2011), commodity futures show significant ability to hedge US inflation, especially for investment horizons of at least one year. Commodity futures in the markets energy, industrial metals, and live cattle have the most favorable hedging properties. However, there is a trade-off between the reduction in real return portfolio variance realized by adding commodity futures indices to the portfolio and the expected real portfolio return. The hedging capacity exhibits substantial variation over time. It has been increasing since the early 1980s and reaches an historical high towards the end of the sample period.
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