Facts and Fantasies About Commodity Futures

Posted: 23 May 2006

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

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Abstract

For this study of the simple properties of commodity futures as an asset class, an equally weighted index of monthly returns of commodity futures was constructed for the July 1959 through December 2004 period. Fully collateralized commodity futures historically have offered the same return and Sharpe ratio as U.S. equities. Although the risk premium on commodity futures is essentially the same as that on equities for the study period, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation is the result, primarily, of commodity futures' different behavior over a business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

Keywords: Derivative Instruments, Commodity Derivatives, Alternative Investments, Commodities, Portfolio Management, Asset Allocation

Suggested Citation

Gorton, Gary B. and Rouwenhorst, K. Geert, Facts and Fantasies About Commodity Futures. Financial Analysts Journal, Vol. 62, No. 2, pp. 47-68, April 2006. Available at SSRN: https://ssrn.com/abstract=903769

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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K. Geert Rouwenhorst

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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