The Fundamentals of Commodity Futures Returns
AbstractCommodity 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13249.
Date of creation: Jul 2007
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- G1 - Financial Economics - - General Financial Markets
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-20 (All new papers)
- NEP-BEC-2007-07-20 (Business Economics)
- NEP-FMK-2007-07-20 (Financial Markets)
- NEP-RMG-2007-07-20 (Risk Management)
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.:
- Chang, Eric C, 1985. " Returns to Speculators and the Theory of Normal Backwardation," Journal of Finance, American Finance Association, vol. 40(1), pages 193-208, March.
- Morten O. Ravn & Harald Uhlig, 2002.
"On adjusting the Hodrick-Prescott filter for the frequency of observations,"
The Review of Economics and Statistics,
MIT Press, vol. 84(2), pages 371-375.
- Ravn, M.O. & Uhlig, H., 2002. "On adjusting the Hodrick-Prescott Filter for the frequency of observations," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
- Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
- Wang, Changyun, 2001. "The behavior and performance of major types of futures traders," MPRA Paper 36426, University Library of Munich, Germany, revised Jul 2002.
- Williams,Jeffrey C. & Wright,Brian D., 2005.
"Storage and Commodity Markets,"
Cambridge University Press, number 9780521023399, October.
- Angus Deaton & Guy Laroque, 1990.
"On The Behavior of Commodity Prices,"
NBER Working Papers
3439, National Bureau of Economic Research, Inc.
- Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-30, April.
- Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983.
"Efficient Asset Portfolios and the Theory of Normal Backwardation,"
Journal of Political Economy,
University of Chicago Press, vol. 91(2), pages 319-31, April.
- Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt59c8m4x6, Department of Agricultural & Resource Economics, UC Berkeley.
- Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," CUDARE Working Paper Series 133R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Szymanowska, M., 2006. "Essays on Rational Asset Pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-193810, Tilburg University.
- Carter, Colin A., 1999. "Commodity futures markets: a survey," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 43(2).
- 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.
- Goorbergh, R.W.J. van den, 2004. "Essays on Optimal Hedging and Investment Strategies and on Derivative Pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-129308, Tilburg University.
- Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
- Bryan Routledge & Duane Seppi & Chester Spatt, .
"Equilibrium Forward Curves for Commodities,"
GSIA Working Papers
1997-50, Carnegie Mellon University, Tepper School of Business.
- Frans A. de Roon & Theo E. Nijman & Chris Veld, 2000.
"Hedging Pressure Effects in Futures Markets,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1437-1456, 06.
- 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.
- Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
- Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
- Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.