We uncover stylized facts of commodity futures’ price and volatility dynamics in the post-financialization period and find a factor structure in daily commodity volatility that is much stronger than the factor structure in returns. The common factor in commodity volatility relates to stock market volatility as well as to the business cycle. Model-free realized commodity betas with the stock market were high during 2008–2010 but have since returned to the pre-crisis level, close to 0. While commodity markets appear segmented from the equity market when considering only returns, commodity volatility indicates a nontrivial degree of market integration.

We introduce a simple and intuitive approach of modeling and forecasting correlations for use in portfolio optimization. The model is composite in nature and consists of elements based on a bivariate realized volatility model. Importantly, our framework allows for volatility spill-overs between assets which provide an edge compared to competing models when forming portfolios. We apply the model to high-frequency data for commodity markets and demonstrate significant economic gains for an investor basing portfolio decisions on our modeling framework. This gain is significant in economic terms, even after imposing realistic constraints on short selling and portfolio turnover.