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Federal Reserve Bank of Dallas
Working Papers
The rank effect for commodities
Ricardo T. Fernholz
Christoffer Koch

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.

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Ricardo T. Fernholz & Christoffer Koch, The rank effect for commodities, Federal Reserve Bank of Dallas, Working Papers 1607, 19 Aug 2016.
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Keywords: Commodity prices; nonparametric methods; asset pricing anomalies; asset pricing factors; efficient markets
DOI: 10.24149/wp1607
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