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The Tactical and Strategic Value of Commodity Futures

Claude B. Erb


Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

January 12, 2006

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.

Number of Pages in PDF File: 61

Keywords: 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

JEL Classification: G12, G13, E44, Q11, Q41, Q14

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Date posted: February 3, 2005  

Suggested Citation

Erb, Claude B. and Harvey, Campbell R., The Tactical and Strategic Value of Commodity Futures (January 12, 2006). Available at SSRN: https://ssrn.com/abstract=650923 or http://dx.doi.org/10.2139/ssrn.650923

Contact Information

Claude B. Erb
TR ( email )
CA 90272
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Duke Innovation & Entrepreneurship Initiative ( email )
215 Morris St., Suite 300
Durham, NC 27701
United States

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