Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13249.
Length: Date of creation: Jul 2007 Date of revision: Handle: RePEc:nbr:nberwo:13249
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Find related papers by JEL classification: G1 - Financial Economics - - General Financial Markets G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Bryant, Henry L. & Bessler, David A. & Haigh, Michael S., 2003.
"Causality In Futures Markets,"
Working Papers
28574, University of Maryland, Department of Agricultural and Resource Economics.
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