In this thesis, we discuss the possible diversification benefits offered by commodity futures, especially in the extreme equity market conditions. We see that adding commodity investments into portfolios could improve their performance with better diversification efficiency. However, with correlation estimation by methods developed by Longin and Solnik(2001) and Ang and Chen(2002), we see correlations between equity and commodity investments increase while they are on downside moves . The results suggest that the diversification benefits offered by commodity investment may change in different market conditions. For further examination, we divide our sample in groups ranked by the home market (U.S. equity investments) returns to see if the commodity-equity portfolio could still perform better over all-equity portfolio in different times. The statistical test shows that the commodity-equity portfolios still perform better than all-equity portfolios. We conclude that commodity investments could make portfolios better-diversified, no matter how the market conditions are.

Ang, A., and J. Chen, 2002, Asymmetric correlations of equity portfolios, Journal of Financial Economics, 63, 3, 443-494
Balkema, A.A., and L. de Haan, 1974, Residual life time at great age, Annals of Probability 2, 792-804
Bodie, Z. and V. Rosansky, 1980, Risk and return in commodity futures, Financial Analysts Journal 36, 27-39
Boyer, B.H., M.S. Gibson, and M. Loretan, 1999, Pitfalls in tests for changes in correlations, International Finance Discussion Paper 597, Board of Governors of the Federal Reserve System
Driesprong, G., Jacobsen, B., and B. Maat., 2008, Striking oil: another puzzle? Journal of Financial Economics, 89(2), 307-327
Evans, J.L., and S. H. Archer. Diversification and the reduction of dispersion: An empirical analysis, Journal of Finance 23, 761-767.
Fontanills, G.,2007, Getting started in commodity,(John Wiley and Sons, New Jersey)
Forbes, K.J. and Roberto Rigobon,2002, No contagion, only interdependence: measuring stock market comovment, Journal of Finance ,57(5), 2223-2261
Geman, H., 2005,Commodities and commodity derivatives: modelling and pricing for agriculturals, metals and energy, (John Wiley and Sons, New Jersey)
Geman, H., Kharoubi, C., 2008 , WTI crude oil Futures in portfolio diversification: The time-to-maturity effect, Journal of Banking & Finance, 32(12), 2553-2559
Gibbons, M., Ross, S. and J. Shanken, 1989, A test of the efficiency of a given portfolio, Econometrica 57, 1121-1152
Gorton, G. and K.G. Rouwenhorst, 2006, Facts and fantasies about commodity futures, Financial Analysts Journal 62, 47-68
Grubel, H. G., 1968, Internationally diversified portfolios: welfare gains and capital flows, American Economic Review 58, 1299-1314.
Gumbel, E.J., 1961, Multivariate extremal distributions, Bulletin de l’Institut International de Statistiques, Session 33, Book 2, Paris
Ingersoll Jr., J.E. 1987, Theory of financial decision making, Rowman &Littlefield Publishers.
International Monetary Fund, 2000, The impact of higher oil prices on the global economy,Research Department, <www.imf.org/external/pubs/ft/oil/2000/oilrep.pdf>
Jobson, J.D. and B.M. Korkie, 1981, Performance hypothesis testing with the Sharpe and Treynor Measures, Journal of Finance, 36(4),889-908
Jones, C.M. and G. Kaul, 1996, Oil and the stock markets, Journal of Finance 51(2),463-491
Levy, H., and M. Sarnat, 1970, International diversification of investment portfolios, American Economic Review 60, 668−675.
Longin, F. and B. Solnik, 2001, Extreme correlation of international equity markets, Journal of Finance, 56(2), 649-676
Markowitz, H. 1952, Portfolio selection, Journal of Finance, 7(1), 77-91.
Pickands, J., 1975, Statistical inference using extreme value order statistics, Annals of Statistics 3, 119-131
Solnik, B. H., 1974, Why not diversify internationally rather than domestically?, Financial Analysts Journal, 30(4), 48-54
Statman, M., 1987, How many stocks make a diversified portfolio?, Journal of Financial and Quantitative Analysis, 22(3),353 -363
Tiago de Oliveira, J., 1973, Statistical extremes-A survey, Center of Applied Mathematics, Lisbon.