A Note on Erb and Harvey (2005)
AbstractThis 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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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2595.
Date of creation: 01 Dec 2005
Date of revision: 01 May 2006
Commodity; commodities; futures; diversification;
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