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Commodity Investing

Author

Listed:
  • K. Geert Rouwenhorst

    (International Center for Finance, Yale School of Management, New Haven, Connecticut 06520-8200)

  • Ke Tang

    (Hanqing Advanced Institute of Economics and Finance and School of Finance, Renmin University of China, Beijing 100872, China)

Abstract

This article reviews the literature on commodities from the perspective of an investor. We re-examine some of the early papers in the literature using recent data and find that the empirical support for the theory of normal backwardation as an explanation for the commodity risk premium is weak and that the evidence is more consistent with storage decisions. We then review the behavior of the main participants in the commodity futures markets with a particular focus on their impact on prices. Although there is continued disagreement in the literature about the role of speculative activity, our results show that money managers are generally momentum (positive feedback) traders, while producers are net short and contrarian (negative feedback) traders. There is less evidence that index traders and swap dealers trade based on past futures returns.

Suggested Citation

  • K. Geert Rouwenhorst & Ke Tang, 2012. "Commodity Investing," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 447-467, October.
    • Handle: RePEc:anr:refeco:v:4:y:2012:p:447-467
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101716
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    More about this item

    Keywords

    commodity futures; theory of storage; theory of normal backwardation; risk premium; trader positions;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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