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Commodities and the Market Price of Risk

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Author Info
Shaun K. Roache
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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/221.

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Length: 23 pages
Date of creation: 15 Sep 2008
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Handle: RePEc:imf:imfwpa:08/221

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Keywords: Commodity prices ; Risk management ; Interest rates ; Asset prices ; Economic models ; Investment ; Working Paper ;

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  4. Jeffrey A. Frankel, 2006. "The Effect of Monetary Policy on Real Commodity Prices," NBER Working Papers 12713, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Shaun K. Roache & Matthew D. Merritt, 2006. "Currency Risk Premia in Global Stock Markets," IMF Working Papers 06/194, International Monetary Fund. [Downloadable!]
  6. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July. [Downloadable!] (restricted)
  7. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January. [Downloadable!] (restricted)
  8. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June. [Downloadable!] (restricted)
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  10. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April. [Downloadable!] (restricted)
  11. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June. [Downloadable!] (restricted)
  12. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(1), pages 1-33. [Downloadable!] (restricted)
  13. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(4), pages 637-67. [Downloadable!] (restricted)
  14. Jagannathan, Ravi, 1985. " An Investigation of Commodity Futures Prices Using the Consumption-based Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 40(1), pages 175-91, March. [Downloadable!] (restricted)
  15. Gary Gorton & K. Geert Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," NBER Working Papers 10595, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Shanken, Jay & Zhou, Guofu, 2007. "Estimating and testing beta pricing models: Alternative methods and their performance in simulations," Journal of Financial Economics, Elsevier, vol. 84(1), pages 40-86, April. [Downloadable!] (restricted)
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  1. Patrizio Pagano & Massimiliano Pisani, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series 999, European Central Bank. [Downloadable!]
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  2. Shaun K. Roache & Marco Rossi, 2009. "The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?," IMF Working Papers 09/140, International Monetary Fund. [Downloadable!]
  3. Giulio Cifarelli & Giovanna Paladino, 2008. "Oil price Dynamics and Speculation. A Multivariate Financial Approach," Working Papers Series wp2008_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze Economiche. [Downloadable!]
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