39 Pages Posted: 21 Oct 2016 Last revised: 28 Oct 2016
Date Written: October 20, 2016
This paper analyzes a novel data set of commodity futures prices over a long sample period starting in 1877, which allows us to shed new light on several important and controversial questions. We document that commodity futures returns:
(1) have been positive on average;
(2) vary significantly across business cycles, inflation episodes, and periods of backwardation versus contango,
(3) are driven mostly by variation of spot returns and therefore closely linked to the underlying commodity spot market;
(4) perform well during inflation cycles and provide more return in backwardated states; and
(5) display low correlation with stocks and bonds.
These long-run stylized facts imply that commodity futures can add value to a diversified portfolio from an asset allocation perspective.
Keywords: Commodities, Spot Returns, Convenience Yields, Carry, Business Cycle, Inflation, Backwardation, Asset Allocation
JEL Classification: G11, G13, E30, N21, N22, Q02
Suggested Citation: Suggested Citation
Levine, Ari and Ooi, Yao Hua and Richardson, Matthew P., Commodities for the Long Run (October 20, 2016). Available at SSRN: https://ssrn.com/abstract=2856435