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Investment shocks and the commodity basis spread

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  • Yang, Fan

Abstract

I identify a “slope” factor in the cross section of commodity futures returns: high-basis commodity futures have higher loadings on this factor than low-basis commodity futures. Combined with a level factor (an index of commodity futures), this slope factor explains most of the average excess returns of commodity futures portfolios sorted by basis. More importantly, I find that this factor is significantly correlated with investment shocks, which represent the technological progress in producing new capital. I investigate a competitive dynamic equilibrium model of commodity production to endogenize this correlation. The model reproduces the cross-sectional futures returns and many asset pricing tests.

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  • Yang, Fan, 2013. "Investment shocks and the commodity basis spread," Journal of Financial Economics, Elsevier, vol. 110(1), pages 164-184.
    • Handle: RePEc:eee:jfinec:v:110:y:2013:i:1:p:164-184
    DOI: 10.1016/j.jfineco.2013.04.012
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    More about this item

    Keywords

    Commodity futures; Investment-based asset pricing; Investment shocks; Basis spread;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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