DBLCI Mean Reversion (MR) Index
Encyclopedia
The DBLCI Mean Reversion Index is a commodity index published by the Deutsche Bank
. Launched at the same time as the Deutsche Bank Liquid Commodity Index
(DBLCI) in February 2003, the DBLCI-Mean Reversion has the same underlying assets. The listed instruments are
also rolled using the same mechanism as the DBLCI, namely energy contracts are
rolled monthly and the metal and grain contracts are rolled annually. This occurs
between the second and sixth business day of the month. The DBLCI-MR is also
quoted in both total returns and excess returns terms in US dollars as well as EUR,
JPY and GBP.
the individual commodity weights are reset every time any one of the commodities
undergoes a ‘trigger event’. This happens when the one-year moving average of the
commodity price is a whole multiple of 5% away from the five-year moving average.
When this happens, the weights of all the commodities are re-balanced such that
‘expensive’ commodities have their weights reduced while ‘cheap’ commodities have
their weights increased according to a simple, pre-defined formula. The entire process
is rule-based and mandatory. The fact that there exist clear pre-set ‘hurdle rates’ to
trigger a re-weighting, minimises the number of re-weightings and thus reduces the
transactions costs for replication.
according to whether a commodity is considered cheap or expensive. When all the
commodities are within 5% of their five-year averages, the weights will automatically
revert to the weights of the base index, the DBLCI. The rationale behind the
construction of the DBCLI-MR is to exploit the tendency of commodity prices to trade
within wide, but, defined ranges because:
The net effect is to keep commodity prices bound around their long run average price.
In essence the DBLCI-MR is a strategy to buy low and sell high. It therefore tends to
take profits gradually in a bull run and re-invest those proceeds into cheaper
commodities. One benefit of this approach is that the DBLCI-MR tends to extract
volatility from the index since as commodity prices rally so to does volatility. evidence suggests that portfolios comprising past losers tend to outperform past winners and vice versa over time, see Hersh Shefrin, Beyond Greed and Fear,
Harvard Business School, 2000. In fact this has been a recurring theme of commodity
markets over the past few years. We find that it has been common for
a commodity to be at the bottom of the league table in terms of total returns in one
year, to be close to the top in the following year only to reverse these gains in the next
12 month period.
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
. Launched at the same time as the Deutsche Bank Liquid Commodity Index
Deutsche Bank Liquid Commodity Index
The Deutsche Bank Liquid Commodity Index was launched in February 2003.It tracks the performance of six commodities in the energy, precious metals, industrialmetals and grain sectors. The DBLCI has constant weightings...
(DBLCI) in February 2003, the DBLCI-Mean Reversion has the same underlying assets. The listed instruments are
also rolled using the same mechanism as the DBLCI, namely energy contracts are
rolled monthly and the metal and grain contracts are rolled annually. This occurs
between the second and sixth business day of the month. The DBLCI-MR is also
quoted in both total returns and excess returns terms in US dollars as well as EUR,
JPY and GBP.
Rolling Methodology
In contrast to the DBLCI, the DBLCI-MR undertakes no annual re-balancing. Instead,the individual commodity weights are reset every time any one of the commodities
undergoes a ‘trigger event’. This happens when the one-year moving average of the
commodity price is a whole multiple of 5% away from the five-year moving average.
When this happens, the weights of all the commodities are re-balanced such that
‘expensive’ commodities have their weights reduced while ‘cheap’ commodities have
their weights increased according to a simple, pre-defined formula. The entire process
is rule-based and mandatory. The fact that there exist clear pre-set ‘hurdle rates’ to
trigger a re-weighting, minimises the number of re-weightings and thus reduces the
transactions costs for replication.
Characteristics of the DBLCI-Mean Reversion
- Six commodities: WTI crude oil, heating oil, aluminium, gold, corn and wheat. The same rolling schedule as the DBLCI.
- No annual rebalancing. Instead commodity weights are adjusted according to a pre-defined formula.
- It is the only commodity index in the marketplace which possesses a dynamic rule-based asset allocation mechanism which attempts to underweight "expensive commodities and overweight "cheap" commodities.
- Total and excess returns data are available from December 1, 1988.
Rationale and Index Mechanism
The DBLCI-Mean Reversion is the only index which dynamically changes its weightsaccording to whether a commodity is considered cheap or expensive. When all the
commodities are within 5% of their five-year averages, the weights will automatically
revert to the weights of the base index, the DBLCI. The rationale behind the
construction of the DBCLI-MR is to exploit the tendency of commodity prices to trade
within wide, but, defined ranges because:
- As prices of commodities rise, new production capacity is brought on line to benefit from higher prices.
- More supply becomes available from alternative sources previously considered uneconomic.
- In oil markets, quota systems that attempt to control supply come under strain as the rewards for cheating rise.
- As prices rise, the demand for the commodity will begin to fall as it faces competition from cheaper sources.
The net effect is to keep commodity prices bound around their long run average price.
In essence the DBLCI-MR is a strategy to buy low and sell high. It therefore tends to
take profits gradually in a bull run and re-invest those proceeds into cheaper
commodities. One benefit of this approach is that the DBLCI-MR tends to extract
volatility from the index since as commodity prices rally so to does volatility. evidence suggests that portfolios comprising past losers tend to outperform past winners and vice versa over time, see Hersh Shefrin, Beyond Greed and Fear,
Harvard Business School, 2000. In fact this has been a recurring theme of commodity
markets over the past few years. We find that it has been common for
a commodity to be at the bottom of the league table in terms of total returns in one
year, to be close to the top in the following year only to reverse these gains in the next
12 month period.
The DBLCI Family of Commodity Indices
- Deutsche Bank Liquid Commodity IndexDeutsche Bank Liquid Commodity IndexThe Deutsche Bank Liquid Commodity Index was launched in February 2003.It tracks the performance of six commodities in the energy, precious metals, industrialmetals and grain sectors. The DBLCI has constant weightings...
(DBLCI) - DBLCI Optimum Yield (OY) IndexDBLCI Optimum Yield (OY) IndexIn May 2006, Deutsche Bank launched a new set of commodity index products calledthe Deutsche Bank Liquid Commodities Indices Optimum Yield, or DBLCI-OY. TheDBLCI-OY indices are available for 24 commodities drawn from the energy, precious...
- DBLCI Optimum Yield (OY) Broad Index
- DBLCI Optimum Yield (OY) Balanced IndexDBLCI Optimum Yield (OY) Balanced IndexThe DBLCI-OY Balanced has the same underlying 14 commodities as the DBLCI-OYBroad, but, the energy sector weight is reduced from 55% of the broad index to 35%.The DBLCI-OY Balanced is designed to be UCITS III compliant, that is the weight of no...
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