The Rank Effect for Commodities

TL;DR

This paper identifies a persistent low-minus-high rank effect in commodities over two centuries, demonstrating it as a structural consequence of stationary relative prices and showing significant excess returns uncorrelated with market risk.

Contribution

It reveals a long-term, structural rank effect in commodities and links it to stationary price distributions, providing a new understanding of asset pricing anomalies.

Findings

Lower-ranked commodities yield 23% higher annual returns.

The rank effect is a necessary consequence of stationary relative prices.

Excess returns have a Sharpe ratio nearly twice that of the U.S. stock market.

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 behavior of relative asset prices.