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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.

Suggested Citation

  • Gary Gorton & K. Rouwenhorst, 2005. "A Note on Erb and Harvey (2005)," Yale School of Management Working Papers amz2595, Yale School of Management, revised 01 May 2006.
    • Handle: RePEc:ysm:wpaper:amz2595
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    File URL: https://repec.som.yale.edu/icfpub/publications/2595.pdf
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    References listed on IDEAS

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    1. 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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