Abstract
This paper document that the commodities/equities beta is positive and hump shaped over shorter holding periods, but declines and becomes negative for longer, business cycle duration, holding periods. The shape of the beta can be understood as a result of common commodities/equities dependence on aggregate economic activity combined with the unique mean reverting component of commodities. Storable commodities behave like financial assets in the short-run, but investment induces mean-reversion that reduces the beta over longer holding periods. The beta is reconstructed theoretically using a novel combined storage and investment partial equilibrium model, and the hypothesis is explored empirically using a structural VAR model for the crude oil market. The findings suggest that a component of the positive hedging benefit of commodities in equity portfolios is due to commodity mean reversion, and that commodity wealth diversification is more effective over longer investment periods.
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