You can't squeeze blood out of a turnip: misconceptions of commodity investments and their disappointing returns

Main, Scott

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https://hdl.handle.net/2142/46619 Copy

Description

Title

You can't squeeze blood out of a turnip: misconceptions of commodity investments and their disappointing returns

Author(s)

Main, Scott

Issue Date

2014-01-16T17:56:24Z

Director of Research (if dissertation) or Advisor (if thesis)

Irwin, Scott H.

Department of Study

Agriculture and Consumer Economics

Discipline

Agricultural & Applied Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Commodities
• Futures
• Term Structure
• Returns
• Investments
• Capital Markets
• Contango
• Backwardation
• Roll Yield

Abstract

This thesis examines questions about long-only commodity investment performance compared to underlying commodity performance. Recent returns have been nothing short of disappointing to investors. A divergence in price has developed between some commodity funds and the observed price of the underlying commodities. Previous studies suggest these differences are caused by a specific scenario within the futures market where the slope of the term structure is positive and holders of futures must roll futures to a higher priced future contract. The explanation herein dispels these conclusions and finds that the main driver of returns to futures is a premium associated with a commodity market. This evidence is presented both graphically and mathematically through a decomposition of the futures returns. Furthermore, this study uses historical returns to demonstrate that returns to static long commodity investments are not likely to generate the investment returns widely expected in recent years.

Graduation Semester

2013-12

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http://hdl.handle.net/2142/46619

Copyright and License Information

Copyright 2013 Scott Main

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