Working Paper: NBER ID: w21243
Authors: Geetesh Bhardwaj; Gary Gorton; Geert Rouwenhorst
Abstract: Gorton and Rouwenhorst (2006) examined commodity futures returns over the period July 1959 to December 2004 based on an equally-weighted index. They found that fully collateralized commodity futures had historically offered the same return and Sharpe ratio as U.S. equities, but were negatively correlated with the return on stocks and bonds. Reviewing these results ten years later, we find that our conclusions largely hold up out-of-sample. The in- and out-of-sample average commodity risk premiums are not significantly different, nor is the cross-sectional relationship between average returns and the basis. Correlations among commodities and commodity correlations with other assets experienced a temporary increase during the financial crisis which is in line with historical experience of variation of these correlations over the business cycle.
Keywords: No keywords provided
JEL Codes: G1; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average risk premium for fully collateralized commodity futures (G13) | risk premium consistent with historical findings (G19) |
| risk premium's correlation with inflation (E31) | correlation remains positive (C10) |
| correlation among commodities during financial crisis (Q02) | correlation returns to long-term averages (C10) |
| futures basis reflecting scarcity of physical inventories (G13) | correlation with cross-section of futures risk premiums (C10) |
| risk premiums for all asset classes (G12) | commodities showing statistically insignificant difference from historical averages (Q02) |