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A Note on Erb and Harvey (2005)

Gary B. Gorton
Yale School of Management; National Bureau of Economic Research (NBER)

K. Geert Rouwenhorst
Yale School of Management - International Center for Finance

May 2005

Yale ICF Working Paper No. 06-02

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.

Keywords: Commodity, commodities, futures, diversification

JEL Classifications: G2, G15, N2

Working Paper Series

Date posted: December 12, 2005 ; Last revised: May 05, 2006

Suggested Citation

Gorton, Gary B. and Rouwenhorst, K. Geert, A Note on Erb and Harvey (2005) (May 2005). Yale ICF Working Paper No. 06-02. Available at SSRN: http://ssrn.com/abstract=869064

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Contact Information

K. Geert Rouwenhorst (Contact Author) Yale School of Management - International Center for Finance ( email ) 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 United States 203-432-6046 (Phone) 203-432-8931 (Fax) HOME PAGE: http://som.yale.edu/~geert/
Gary B. Gorton Yale School of Management ( email ) 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 United States 203 432-8931 (Fax) HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States