The Tactical and Strategic Value of Commodity Futures
Historically, commodity futures have had excess returns similar to those of equities. But what should we expect in the future? The usual risk factors are unable to explain the time-series variation in excess returns. In addition, our evidence suggests that commodity futures are an inconsistent, if not tenuous, hedge against unexpected inflation. Further, the historically high average returns to a commodity futures portfolio are largely driven by the choice of weighting schemes. Indeed, an equally weighted long-only portfolio of commodity futures returns has approximately a zero excess return over the past 25 years. Our portfolio analysis suggests that the a long-only strategic allocation to commodities as a general asset class is a bet on the future term structure of commodity prices, in general, and on specific portfolio weighting schemes, in particular. In contrast, we provide evidence that there are distinct benefits to an asset allocation overlay that tactically allocates using commodity futures exposures. We examine three trading strategies that use both momentum and the term structure of futures prices. We find that the tactical strategies provide higher average returns and lower risk than a long-only commodity futures exposure.
|Date of creation:||Mar 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gary Gorton & K. Rouwenhorst, 2004.
"Facts and Fantasies about Commodity Futures,"
Yale School of Management Working Papers
amz2619, Yale School of Management, revised 01 Mar 2005.
- John H. Cochrane, 1999.
"New Facts in Finance,"
NBER Working Papers
7169, National Bureau of Economic Research, Inc.
- Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
- Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
- Frans A. de Roon & Theo E. Nijman & Chris Veld, 2000.
"Hedging Pressure Effects in Futures Markets,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1437-1456, 06.
- Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
- Robert W. Kolb, 1992. "Is normal backwardation normal?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(1), pages 75-91, 02.
- Nijman, T.E. & Swinkels, L.A.P., 2003. "Strategic and Tactical Allocation to Commodities for Retirement Savings Schemes," Discussion Paper 2003-20, Tilburg University, Center for Economic Research.
- repec:dgr:kubcen:200320 is not listed on IDEAS
- repec:ner:tilbur:urn:nbn:nl:ui:12-83944 is not listed on IDEAS
- Fernholz, Robert & Shay, Brian, 1982. " Stochastic Portfolio Theory and Stock Market Equilibrium," Journal of Finance, American Finance Association, vol. 37(2), pages 615-24, May.
- Gerald R. Jensen & Robert R. Johnson & Jeffrey M. Mercer, 2000. "Efficient use of commodity futures in diversified portfolios," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(5), pages 489-506, 05.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11222. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.