A Note on Erb and Harvey (2005)

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.

Number of Pages in PDF File: 10

Keywords: Commodity, commodities, futures, diversification

JEL Classification: G2, G15, N2

working papers series