The rank effect for commodities
Ricardo Fernholz and
Christoffer Koch
No 1607, Working Papers from Federal Reserve Bank of Dallas
Abstract:
We uncover a large and significant low-minus-high rank effect for commodities across two centuries. There is nothing anomalous about this anomaly, nor is it clear how it can be arbitraged away. Using nonparametric econometric methods, we demonstrate that such a rank effect is a necessary consequence of a stationary relative asset price distribution. We confirm this prediction using daily commodity futures prices and show that a portfolio consisting of lower-ranked, lower-priced commodities yields 23% higher annual returns than a portfolio consisting of higher-ranked, higher-priced commodities. These excess returns have a Sharpe ratio nearly twice as high as the U.S. stock market yet are uncorrelated with market risk. In contrast to the extensive literature on asset pricing factors and anomalies, our results are structural and rely on minimal and realistic assumptions for the long-run properties of relative asset prices.
Keywords: Commodity prices; nonparametric methods; asset pricing anomalies; asset pricing factors; efficient markets (search for similar items in EconPapers)
JEL-codes: C14 G11 G12 G14 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-08-19
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Working Paper: The Rank Effect for Commodities (2016) 
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:1607
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DOI: 10.24149/wp1607
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