EDHEC: Long-Term Sources of Return in the Commodity Futures Markets: Evidence from the Grain Markets
Posted: 31 July 2008 | Source: EDHEC
Prior to 2006, the exponential rise in financial derivatives since the late 1970’s had crowded out academic and practitioner interest in the commodity futures markets. As a matter of fact, there were surprisingly few long-term studies on commodity futures returns that had analysed these markets in an original way. Notable exceptions were Greer (1978) and Bodie and Rosansky (1980); these authors discussed both the equity-like returns and inflation-hedging properties of investments in baskets of commodity futures contracts.
In 2006, fresh academic perspectives were finally offered regarding the nature of historical commodity futures returns. During that year, the Financial Analysts Journal included a spirited debate on the inherent sources of return in commodity futures investing. On one side were Gorton and Rouwenhorst (2006), who argued primarily for a structural risk premium that is available across commodity futures contracts; and on the other side were Erb and Harvey (2006), who argued mainly for a strategy return that is due to how one weights and rebalances the components of a commodity index. As of 2008, this debate has still not been resolved.