gammaman

Oil Contango: Roll Yield Rewards

Gorton and Rouwenhorst's paper uses an equation which results in a leveraged data set (ie, leverage performance). Further, their equation for calculating roll returns is impossible to recreate in the real world. Even Till admits as much. Erb and Harvey's analysis is better. Empirical studies are inconsistent and do not agree there is a risk premia. Dusak concluded there was zero systematic risk. The paradox is that for every buyer of a futures contract there is a seller--a zero sum game. Roll return concept is flawed because it is based on a current convention using term structure of futures price curve. Keynes' definition, on the other hand, related backwardation to the expected future spot price. If you mix the two, you get something call "roll yield permutations." See ssrn.com/abstract=1029... for investigation of commodityasset pricing models and why they're inherently flawed.