SLIDE 1 The Long-Term Performance of Commodity Futures
Q-Group Seminar, Key Largo April 4, 2005
Gary Gorton, Wharton, University of Pennsylvania
- K. Geert Rouwenhorst, School of Management, Yale University
SLIDE 2
1
Futures Price vs. Expected Spot Price
Inception (t) Expiration (T)
Futures Price(Ft) Spot & Futures Price Converge at Expiry ST= FT=27 Expected Spot Price at Expiry E(ST) Spot Price(St) Market Participants Expect $3 Spot Price Fall
27 25 30 27
Investors Expect $2 Risk Premium
SLIDE 3
2
Collateralized Crude Oil Futures vs. Spot Prices
Futures Up 87% While Spot Prices Decline 53%
SLIDE 4
3
Spot vs. Futures Returns
Inflation Adjusted Performance From 1959 to 2004
SLIDE 5
4
Commodity Futures, Stocks and Bonds
Inflation Adjusted Performance From 1959 to 2004
SLIDE 6
5
Risk Premium by Asset Class
Annualized Monthly Excess Returns From 1959 to 2004
SLIDE 7
6
Risk and Return by Asset Class
Annualized Monthly Returns From 1959 to 2004
SLIDE 8
7
Commodity Futures and Stocks
Distribution of Monthly Returns From 1959 to 2004
SLIDE 9
8
Correlation of Commodity Futures With Other Financial Assets
Overlapping Return Data From 1959 to 2004
SLIDE 10
9
Distribution of Monthly Equity Returns
SLIDE 11
10
Tail Distribution of Monthly Equity Returns
SLIDE 12
11
Correlation of Asset Classes With Inflation
Overlapping Returns From 1959 to 2004
SLIDE 13
12
Correlation With Inflation Components
Overlapping Returns From 1959 to 2004
SLIDE 14
13
Phases of the Business Cycle
SLIDE 15
14
Commodity Futures, Stocks and Bonds
Average Returns by Business Cycle Stage From 1959 to 2004
SLIDE 16
15
Commodity Futures vs. Shares in Commodity Companies
Inflation Adjusted Performance From 1962 to 2003
SLIDE 17 16
Summary
Returns
- The historical risk premium of commodity futures is
comparable to the risk premium of stocks and exceeds the risk premium of bonds.
- Stocks of commodity companies are a poor substitute for
investments based on commodity futures.
Risks
- Commodity futures historically have been less risky than
stocks, both in terms of volatility and downside risk.
- Commodity futures historically have been negatively
correlated with stocks and bonds. The negative correlation is stronger over longer holding periods.
- Commodity futures have performed better in periods of
inflation (especially unexpected inflation), when stock and bond returns have generally disappointed.
- Commodities may diversify the cyclical variation in stock and
bond returns.
SLIDE 18
17
Sensitivity of Equally-Weighted Commodity Indices to Rebalancing Assumptions
Data From 1959 to 2004
SLIDE 19
18
Average Historical Returns to Individual Commodity Futures
Data From 1959 to 2004
SLIDE 20
19
Average Historical Standard Deviation of Return to Individual Commodity Futures
Data From 1959 to 2004
SLIDE 21
20
Average Historical Pair Wise Correlation of Individual Commodity Futures
Data From 1959 to 2004
SLIDE 22
21
Cumulative Total Return of Commodity Futures Monthly Re-Sorted Portfolios According to Basis
Data From 1959 to 2004
SLIDE 23
22
Monthly Excess Returns of Commodity Futures Portfolios Selected According to Futures Basis
Monthly Data From 1959 to 2004
