Investors face a number of challenges when seeking to estimate the prospective performance of a long-only investment in commodity futures. For instance, historically, the average annualized excess return of individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. However, the prospective annualized excess return of a rebalanced portfolio of commodity futures can be “equity-like”. Certain security characteristics, such as the term structure of futures prices, and some portfolio strategies have historically been rewarded with above average returns. Avoiding naive extrapolation of historical returns and striking a balance between dependable sources of return and possible sources of return is important. This is the unabridged version of our 2006 publication in the Financial Analysts Journal.

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The Tactical and Strategic Value of Commodity Futures

The objective of a defined-benefit pension fund9s asset allocation policy should be to fully fund accrued pension liabilities at the lowest cost to the plan sponsor, subject to sensible risk. A major risk plan sponsors face is that higher contributions will be required should the asset portfolio not be constructed properly. Specifically, the plan sponsor in establishing its asset allocation strategy should take into account both the present value of liabilities (cash flows) and the volatile behavior of the value of the liabilities due to changes in interest rates. While fluctuations in the present value of assets versus liabilities (funding ratios) represent high financial risk for all plan sponsors, most plan sponsors fail to recognize this risk because it is seriously attenuated by actuarial and accounting smoothing of financial statements. Instead, due to the way pension contributions are calculated, and earnings reported, plan sponsors focus on the return on asset assumption rather than assets versus liabilities. The authors look at the performance of defined-benefit corporate pension plans in 2000 and 2001, and consider the implications of this performance for future corporate earnings. They then address issues associated with measuring pension liabilities and offer solutions to deal with this measurement problem.

Rethinking Pension Liabilities and Asset Allocation

I present simple estimators for the expected returns of stocks and bonds and compare them to the standard historical, or sample mean, estimator. I show that as a result of a capital gains constraint that stocks and bonds must satisfy, the historical estimator can be acutely biased. I further show that an estimator for the expected return of stocks derived from the Edwards-Bell-Ohlson equation yields unbiased estimates that are useful in practice. Finally, I estimate the equity risk premium and show that it is positive, contradicting Arnott and Ryan's [2001] claim that it is negative.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID327300_code021002500.pdf?abstractid=327300&mirid=1&type=2

Estimating Expected Returns

We study the land and stock markets in Japan circa 1990 and in 2013. While the Nikkei stock average in the late 1980s and its % crash in 1990 is generally recognized as a financial market bubble, a bigger bubble and crash was in the land market. The crash in the Nikkei which started on the first trading day of 1990 was predictable in April 1989 using the bond-stock earnings yield model which signalled a crash but not its exact moment. We show that it was possible to use the changepoint detection model based solely on price movements for profitable exits of long positions both circa 1990 and in 2013.

/pdf/land-and-stock-bubbles-crashes-and-exit-strategies-in-japan-13836qwwpb.pdf

Land and stock bubbles, crashes and exit strategies in Japan circa 1990 and in 2013

Some recent empirical works indicate that investor performance and market patterns are primarily information driven instead of a behavioral phenomenon. However, Grossman and Stiglitz information theory and its variations offer little guidance in identifying informed investors and in distinguishing between securities with scarce information and those with widely available information. We show that most empirical evidences about market behaviors documented in the literature can be explained by a new information theory generalized from Shannon's entropy theory of information. Investor performance and market patterns are the results of information processing by investors of different sizes with different background knowledge.

Information Theory and Market Behavior

Two years ago, following a July 1999 speech by Warren Buffett, chairman of Berkshire Hathaway, on the stock market--a rare subject for him to discuss publicly--FORTUNE ran what he had to say under the title Mr Buffett on the Stock Market (Nov 22, 1999) His main points then concerned two consecutive and amazing periods that American investors had experienced, and his belief that returns from stocks were due to fall dramatically Since the Dow Jones Industrial Average was 11194 when he gave his speech and recently was about 9900, no one yet has the goods to argue with him

http://tilsonfunds.com/BuffettStockMarket.pdf

Warren Buffett

Papers

Warren Buffett on the Stock Market