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Abstract:
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.

Abstract:
Investors face a number of challenges when seeking to estimate the prospective performance of a long-only investment in commodity futures. For instance, historically, the average annualized excess return of individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. However, the prospective annualized excess return of a rebalanced portfolio of commodity futures can be equity-like. Certain security characteristics, such as the term structure of futures prices, and some portfolio strategies have historically been rewarded with above average returns. Avoiding naïve extrapolation of historical returns and striking a balance between dependable sources of return and possible sources of return is important. This is the unabridged version of our 2006 publication in the Financial Analysts Journal.

Strategic asset allocation, Tactical asset allocation, Diversification return, Roll return, Momentum, Market timing, Convenience yield, Contango, Backwardation, Normal backwardation, Commodity correlation, Commodity risk factors, Commodity term structure, Trading strategies, Overlay strategies

Abstract:
How important is an understanding of country risk for investors? Given the increasingly global nature of investment portfolios, we believe it is very important. Our paper measures the economic content of five different measures of country risk: The International Country Risk Guide is political risk, the financial risk, economic risk and composite risk indices and Institutional Investoris country credit ratings. First, we explore whether any of these measures contain information about future expected stock returns by conducting trading simulations. Next, we conduct time-series-cross-sectional analysis linking these risk measures to future expected returns. Second, we investigate the relation between these measures and other, more standard, approaches to risk exposures. Finally, we analyze the linkages between fundamental attributes within each economy, such as book-to-price ratios, and the risk measures. Our results suggest that the country risk measures are correlated future equity returns. We find that the country risk measures are correlated with each other, however, financial risk measures contain the most information about future equity returns. Finally, we find that country risk measures are highly correlated with country equity valuation measures. This provides some insight into the reason why value-oriented strategies generate higher returns.

Country Risk Assessment, Mean-Reverision of Risk, Country Trading Strategies, Risk Exposure

Abstract:
We analyze expected returns and volatility in 135 different markets. We argue that country credit risk is a proxy for the ex-ante risk exposure of, particularly, segmented developing countries. We fit a time-series cross-sectional regression using data on the 47 countries which have equity markets. These regressions predict both expected returns and volatility using credit risk as a single explanatory variable. We then use the credit rating data on the other 88 countries to project hurdle rates and volatility into the future. Finally, we calculate for each country, the expected time in years, given the forecasted country risk premium and volatility, for an investor to break even and double the initial investment - with 90% probability. This is the final working paper version of our 1996 Journal of Portfolio Management paper.

International cost of capital, country hurdle rates, forecasting volatility, forecasting correlation, country rate of return, country risk, political risk, credit ratings, risk ratings, hitting time

Abstract:
Is there information in the commonly used indicators of country risk for expected global fixed income returns and volatility? We examine the information content in publicly available measures of political, financial and economic risk. We find that these ex-ante measures contain important information about the cross-section of expected fixed income and currency returns. Trading strategies based on the change in, and level of, these risk measures produce positive risk-adjusted returns. We find that the country risk measures are significantly correlated with international bond metrics, such as real yields. This is the final working paper version of our 1996 Journal of Fixed Income publication.

global bond strategies, predicting bond returns, trading strategies, interest rates, political risk, economic risk, financial risk, country risk, trading strategies, active management

Abstract:
We explore the cross-sectional determinants of emerging equity market returns. We find that the behavior of emerging market returns differs substantially from the behavior of developed equity market returns and that these differences have persisted in the period ending June 1996. While there are some similarities between the cross-sectional determinants of emerging and developed market equity returns, emerging market strategies must take into account the special characteristics of these markets. In particular, the degree of integration of these markets with world equity markets has changed through time. This time-varying integration must be taken into account in asset allocation strategies.

This is the final working paper version of a chapter we wrote for a book published in 1997.

emerging market returns, predicting equity returns, factors, active management, market integration, asset allocation, emerging markets, time-varying integration

Abstract:
Population demographics impact both the time-series and cross-section of expected asset returns. A number of theories link the average age of a population to expected market returns. For example, Bakshi and Chen (1994) argue that an older population will demand a higher premium on equity investment because their risk aversion is higher. We argue that, in an international context, population demographics are more likely to reveal information about the risk exposure of a particular country. Our evidence supports the risk hypothesis.

This is the last working paper version of our 1997 Financial Analysts Journal article.

global investment, population, international stock returns, asset allocation, active management, risk premium

Abstract:
Investors face numerous challenges when seeking to estimate the prospective performance of a longonly investment in commodity futures. For instance, historically, the average annualized excess return of the average individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. The prospective annualized excess return of a rebalanced portfolio of commodity futures, however, can be equity-like. Some security characteristics (such as the term structure of futures prices) and some portfolio strategies have historically been rewarded with above-average returns. It is important to avoid naive extrapolation of historical returns and to strike a balance between dependable sources of return and possible sources of return.

This paper is a shortened version of an earlier working paper. The unabridged version of this paper can be found at http://ssrn.com/abstract=650923.

Derivative Instruments, Commodity Derivatives, Alternative Investments, Commodities, Portfolio Management, Asset Allocation