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Commodities and the Market Price of Risk

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  • Shaun K. Roache
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    Abstract

    Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton''s (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/221.

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    Length: 23
    Date of creation: 01 Sep 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/221

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    Related research

    Keywords: Commodity prices; Risk management; Interest rates; Economic models; commodity futures; investors; risk premium; hedge; risk exposure; real interest rates; hedging; stock market; futures contracts; interest rate risk; expected returns; equity market; commodity futures contracts; futures prices; futures markets; financial assets; arbitrage pricing theory; stock markets; currency risk; present value; commodity futures prices; fixed income; stock market index; bond; gold futures; global stock markets; open interest; hedges; asset markets; futures price; financial instruments; backwardation; interest income; futures contract; financial market; financial markets; stock returns; financial economics; bond markets;

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    1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, Elsevier, vol. 13(3), pages 341-360, December.
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    15. Jagannathan, Ravi, 1985. " An Investigation of Commodity Futures Prices Using the Consumption-based Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 175-91, March.
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    Cited by:
    1. Pagano, Patrizio & Pisani, Massimiliano, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series, European Central Bank 0999, European Central Bank.
    2. Cochran, Steven J. & Mansur, Iqbal & Odusami, Babatunde, 2012. "Volatility persistence in metal returns: A FIGARCH approach," Journal of Economics and Business, Elsevier, Elsevier, vol. 64(4), pages 287-305.
    3. Roache, Shaun K. & Rossi, Marco, 2010. "The effects of economic news on commodity prices," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 50(3), pages 377-385, August.
    4. Giulio Cifarelli & Giovanna Paladino, 2008. "Oil price Dynamics and Speculation. A Multivariate Financial Approach," Working Papers - Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa wp2008_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    5. Daskalaki, Charoula & Kostakis, Alexandros & Skiadopoulos, George, 2014. "Are there common factors in individual commodity futures returns?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 346-363.
    6. Mukherjee, Dr. Kedar nath, 2011. "Commodity investments: opportunities for Indian institutional investors," MPRA Paper 33510, University Library of Munich, Germany.
    7. Shaun K. Roache & Marco Rossi, 2009. "The Effects of Economic Newson Commodity Prices," IMF Working Papers, International Monetary Fund 09/140, International Monetary Fund.
    8. Cifarelli, Giulio & Paladino, Giovanna, 2009. "Oil and portfolio risk diversification," MPRA Paper 28293, University Library of Munich, Germany, revised Nov 2010.
    9. Giulio Cifarelli & Giovanna Paladino, 2009. "Is Oil A Financial Asset? An Empirical Investigation Spanning the Last Fifteen Years," Working Papers - Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa wp2009_12.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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