K. Geert Rouwenhorst
Robert B. and Candice J. Haas Professor of Corporate Finance & Deputy Director of the International Center for Finance
Professor Rouwenhorst specializes in international finance and asset pricing, including the empirical tradeoff between risk and return in developed and emerging stock markets, and portfolio choice. His recent work examines hedge fund strategies, mutual fund settlement, commodity investments, and the history of financial innovation. Professor Rouwenhorst's work has been published in both academic and practitioner oriented journals, and reviewed in The Wall Street Journal, The Financial Times, and The New York Times. His co-edited book Origins of Value was named a best book of 2005 by The Economist and Barron's.
Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors (With Geetesh Bhardwaj and Gary Gorton) Investors face significant barriers in evaluating the performance of hedge funds and commodity trading advisors (CTAs). The only available performance data comes from voluntary reporting to private companies. Funds have incentives to strategically report to these companies, causing these data sets to be severely biased. And it has proven difficult to determine whether they add value relative to benchmarks. We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain.
The Fundamentals of Commodity Futures Returns (With Gary Gorton and Fumio Hayashi) Commodity futures markets allow market participants to obtain insurance against the fluctuations of future spot prices of commodities. Prior research by Gorton and Rouwenhorst (2006) shows that long investors in commodity futures markets have historically received a risk premium of 5% per annum in return for assuming some of the price risk of short hedgers. This risk premium has historically varied in systematic ways across commodities and over time depending on the level of physical inventories. Empirical results show that the compensation for bearing price risk increases at low inventory levels, when theory predicts that the amount of risk to insure increases. The paper provides an economic rational for several commodity futures trading strategies based on price signals. In particular, returns to certain strategies based on backwardation and prior returns are successful because these price signals select commodities when their inventories are low.
Origins of Value: The Financial Innovations that created Modern Capital Markets What are the origins of financial contracts as they exist today?
(William N. Goetzmann and K. Geert Rouwenhorst eds.) provides a
documentary overview of the history of financial innovation, from the
invention of interest in Mesopotamia and the origins of paper money in
China, to the creation of mutual funds, inflation-indexed bonds, and
global financial securities. Named a Best Book of 2005 by The Economist, and Baron's.
Long-term Global Market Correlations The correlation structure of the world equity markets varies
considerably over the past 150 years. The paper with William N.
Goetzmann and Lingfeng Li shows that correlations were high during
periods of economic and financial integration. We decompose the
benefits of international diversification into two parts: a component
that measures variation of the average correlation across markets, and
a component that measures variation of the investment opportunity set.
Globalization is associated with relatively high correlations, and an
increase in the investment opportunity set. From this, we infer that
periods of globalization have both benefits and drawbacks for
international investors 
Pairs Trading is a Wall Street investment strategy by which stocks are matched into
pairs according to minimum distance in historical normalized price
space. With Will Goetzmann and Evan Gatev, we examine the profitability
of a simple trading rule from 1962 to 2002, and find average annualized
excess returns of up to 11 percent for a number of self-financing
portfolios of top pairs. Our historical trading profits exceed a
conservative estimate of transaction costs through most of the period.
Bootstrap results suggest that the "pairs effect" differs from
previously documented mean reversion profits. The robustness of the
excess returns indicates that pairs trading is a risk arbitrage that
profits from the temporary mis-pricing of close substitutes, We link
the profitability of pairs trading to the presence of a common factor
in the returns that is different from conventional measures of risk
explanations.
The Long-term Properties of Commodity Futures Together with Gary Gorton we construct an equally-weighted index of
commodity futures monthly returns over the period between July of 1959
and December of 2004 in order to study simple properties of commodity
futures as an asset class. Fully-collateralized commodity futures have
historically offered the same return and Sharpe ratio as equities.
While the risk premium on commodity futures is essentially the same as
equities, commodity futures returns are negatively correlated with
equity returns and bond returns. The negative correlation between
commodity futures and the other asset classes is due, in significant
part, to different behavior over the business cycle. In addition,
commodity futures are positively correlated with inflation, unexpected
inflation, and changes in expected inflation.
Day Trading International Funds Many US mutual funds ignore value relevant information when calculating daily Net Asset Values.
The problem is particularly severe for funds that invest in foreign markets. The graph shows the
cumulative return to a simple day-trading strategy that switches in and out of foreign stock funds based
on publicly available information. Joint research
with William Goetzmann and Zoran Ivkovich discusses methods for improving the informational efficiency of the NAV computation.
Country versus Industry In my 1999 Financial Analyst Journal I reported that country selection continued to be more important than
sector selection in Europe. Using data through the August of 2000, and
using the new MSCI industry assignments, I find that industry effects
are at least of similar magnitude as country effects.
History of Financial Innovation:
Some Sample Innovations:
The Anglo-Saxon Origins of Mutual Funds are often traced back to the 
Foreign and Colonial Government Trust of 1868. Almost a century earlier Abraham van Ketwich
founded two multiple unit investment trusts, Eendragt Maakt Magt(1774), and Concordia Res Parvae Crescunt (1779). The
latter existed for 114 years before it was liquidated in 1893.
18th century International Investment Funds and the Debt of the United States. French and Dutch investors were the major foreign financiers of the
A
merican Revolution. In addition to international loans, foreign
investors also invested in the domestic debt of the United States
through investment trusts that were formed to speculate on the future
credit of the country. Depicted is a Treasury certificate made out to
Daniel Crommelin and Sons - a Dutch merchant bank that organized a
number of these trusts.
Depository Receipts and investing in 19th century Russia. Stock substitutions were popular among small investors, because they
enhanced liquidity and saved on transactions cost associated with
investing in foreign markets. 
Investment 
banks would purchase
securities in the foreign market and issue certificates in the domestic
market that were fully backed by the foreign assets. Any interest or
dividends on the foreign securities would simply be passed on to the
certificate holders. Pictured are an 1854 inscription in the book of
public debt in the name of Hope and Co, Ketwich and Voombergh, and
Widow W. Borski - an association of Dutch merchant bankers specializing
in stock substitutions - and an 1857 depository receipt issued in the
Dutch market.
18th century Stock Options. The Keyserlyke Indische Companie was a competitor of the Dutch East
India Company. Various brokers in Antwerpen traded call options on
Keyserlyke shares during the beginning of the 18th century. The
contract had all the features of modern call options: a right to buy a
share at a fixed price on or before a prespecified date. For this right
the buyer of the option paid the seller a premium. (Click on the image
to the right to view a picture of the original contract. Click here to view a translation of the contract.)
If you have suggestions for additions to my list of financial innovations - please email me