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The Term Structure of Commodity Risk Premiums and the Role of Hedging

Author

Listed:
  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Nick Stenner

    (Reserve Bank of Australia)

Abstract

A standard theory used to explain commodity futures prices decomposes the futures price into the expected spot price at maturity of the futures contract and a risk premium. This article investigates the term structure of commodity risk premiums. We find that risk premiums vary across futures contract maturities, and that the term structure of commodity risk premiums differs between commodities. Furthermore, the risk premiums on crude oil and heating oil have fallen since the mid 2000s, consistent with increased financial investment in these futures markets. This article also outlines evidence to suggest that the existence of a commodity risk premium is related to the hedging activities of market participants

Suggested Citation

  • Jonathan Hambur & Nick Stenner, 2016. "The Term Structure of Commodity Risk Premiums and the Role of Hedging," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 57-66, March.
    • Handle: RePEc:rba:rbabul:mar2016-07
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    File URL: https://www.rba.gov.au/publications/bulletin/2016/mar/pdf/bu-0316-7.pdf
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    Cited by:

    1. Georges Prat & Remzi Uctum, 2021. "Modeling ex-ante risk premia in the oil market," Working Papers hal-03508699, HAL.

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