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A Note on Erb and Harvey (2005)

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  • Gary Gorton
  • K. Rouwenhorst

Abstract

This note is a response to a recent paper by Erb and Harvey (2005). We show that diversification returns are mathematical properties of geometric averages of index returns, and not due to rebalancing. We also show how rebalancing affects the performance of the equal-weighted commodity futures index constructed by Gorton and Rouwenhorst (2005). Because rebalancing is an embedded trading strategy, it can be a source of return. Less frequent rebalancing would have increased, rather than lowered the performance of the equally-weighted commodity index.

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File URL: http://icfpub.som.yale.edu/publications/2595
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2595.

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Date of creation: 01 Dec 2005
Date of revision: 01 May 2006
Handle: RePEc:ysm:somwrk:amz2595

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Web page: http://icf.som.yale.edu/
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Keywords: Commodity; commodities; futures; diversification;

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  1. Gary Gorton & K. Geert Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," NBER Working Papers 10595, National Bureau of Economic Research, Inc.
  2. Claude B. Erb & Campbell R. Harvey, 2005. "The Tactical and Strategic Value of Commodity Futures," NBER Working Papers 11222, National Bureau of Economic Research, Inc.
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