Abstract: The increasing variety of commodity futures provides a feasible way to improve the risk-return structure of traditional portfolio for Chinese investors.While the trend of commodity financialization indicates that the diversification benefit of commodity futures may be vanishing.
Based on mean-variance spanning test under different distribution assumptions about asset returns, this paper investigates the potential benefits of commodity futures in Chinese market. Moreover, the in-sample and out-of-sample portfolio effects are analyzed by adding commodity futures to a stock-bond portfolio for typical asset allocation strategies such as equally-weighted, risk-parity and mean-variance model.
The empirical results of this paper indicate that the addition of commodity futures in the sample period can significantly improve the risk-return structure of traditional portfolio selection, no matter whether short selling constraint is set or not. Moreover,the improvement of portfolio efficient frontier by commodity futures is mainly realized by risk reduction, whilethe addition of commodity futures can hardly bring excess returns to traditional stock-bond portfolio.Furthermore,the introduction of commodity futures can effectively reduce the standard deviation and tail risk in out-of-sample rolling test, and the allocation of commodity futures by investors with high risk aversion can achieve higher equivalence returns.
The findings of this paper show that although the trend of commodity financialization is irreversible, the introduction of commodities into traditional portfolio is still an effective way to enhance portfolio performance in Chinese market.

Key words: commodity financialization, mean-variance spanning test, out-of-sample rolling, diversification benefits, efficient frontier