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The rank effect for commodities

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We uncover a large and significant low-minus-high rank effect for commodities across two centuries. There is nothing anomalous about this anomaly, nor is it clear how it can be arbitraged away. Using nonparametric econometric methods, we demonstrate that such a rank effect is a necessary consequence of a stationary relative asset price distribution. We confirm this prediction using daily commodity futures prices and show that a portfolio consisting of lower-ranked, lower-priced commodities yields 23% higher annual returns than a portfolio consisting of higher-ranked, higher-priced commodities. These excess returns have a Sharpe ratio nearly twice as high as the U.S. stock market yet are uncorrelated with market risk. In contrast to the extensive literature on asset pricing factors and anomalies, our results are structural and rely on minimal and realistic assumptions for the long-run properties of relative asset prices.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2016/wp1607.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1607.

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Length: 26 pages
Date of creation: 19 Aug 2016
Handle: RePEc:fip:feddwp:1607
DOI: 10.24149/wp1607
Contact details of provider: Web page: http://www.dallasfed.org/
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  1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
  2. Nielsen, Lars Tyge, 1999. "Pricing and Hedging of Derivative Securities," OUP Catalogue, Oxford University Press, number 9780198776192.
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