A Note on Erb and Harvey (2005)

10 Pages Posted: 12 Dec 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

Date Written: May 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.

Keywords: Commodity, commodities, futures, diversification

JEL Classification: G2, G15, N2

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: https://ssrn.com/abstract=869064

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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