The Rank Effect for Commodities

26 Pages Posted: 23 Aug 2016

See all articles by Ricardo T. Fernholz

Ricardo T. Fernholz

Claremont McKenna College - Robert Day School of Economics and Finance

Christoffer Koch

Federal Reserve Bank of Dallas

Date Written: 2016-08-19

Abstract

We uncover a large and significant low-minus-high rank effect for commodities across two centuries. There is nothing anomalous about this anomaly, nor is it clear how it can be arbitraged away. Using nonparametric econometric methods, we demonstrate that such a rank effect is a necessary consequence of a stationary relative asset price distribution. We confirm this prediction using daily commodity futures prices and show that a portfolio consisting of lower-ranked, lower-priced commodities yields 23% higher annual returns than a portfolio consisting of higher-ranked, higher-priced commodities. These excess returns have a Sharpe ratio nearly twice as high as the U.S. stock market yet are uncorrelated with market risk. In contrast to the extensive literature on asset pricing factors and anomalies, our results are structural and rely on minimal and realistic assumptions for the long-run properties of relative asset prices.

Keywords: Commodity prices, nonparametric methods, asset pricing anomalies, asset pricing factors, efficient markets

JEL Classification: C14, G11, G12, G14

Suggested Citation

Fernholz, Ricardo T. and Koch, Christoffer, The Rank Effect for Commodities (2016-08-19). FRB of Dallas Working Paper No. 1607. Available at SSRN: https://ssrn.com/abstract=2826964 or http://dx.doi.org/10.24149/wp1607

Ricardo T. Fernholz (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Christoffer Koch

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX Texas 75265-5906
United States

HOME PAGE: http://www.dallasfed.org

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