Facts and Fantasies about Commodity Futures

Gary Gorton, K. Geert Rouwenhorst

NBER Working Paper No. 10595
Issued in June 2004, Revised in March 2006
NBER Program(s):Asset Pricing Program

We construct an equally-weighted index of commodity futures monthly returns over the period between July of 1959 and March of 2004 in order to study simple properties of commodity futures as an asset class. Fully-collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. While the risk premium on commodity futures is essentially the same as equities, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation between commodity futures and the other asset classes is due, in significant part, to different behavior over the business cycle. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

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Document Object Identifier (DOI): 10.3386/w10595

Published: Gorton, Gary and K. Geert Rouwenhorst. "Facts And Fantasies About Commodity Futures," Financial Analysts Journal, 2006, v62(2,Mar/Apr), 47-68.

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