By Adrian Fernandez-Perez, Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Cass Business School, City, University of London, U.K.; and Joëlle Miffre, EDHEC Business School, Nice, France
As summarized by Ana-Maria Fuertes, Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board
This article investigates the nexus between idiosyncratic volatility and returns in commodity futures markets. The authors find that the seemingly abnormal performance of active strategies that systematically exploit idiosyncratic volatility turns out to be a fallacy associated with the use of an inappropriate benchmark. Instead, suitable benchmarks reveal that idiosyncratic volatility cannot be a specifically rewarded risk factor since it can be diversified away.