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Investment shocks and the commodity basis spread

  • Yang, Fan
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X13001360
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 110 (2013)
    Issue (Month): 1 ()
    Pages: 164-184

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    Handle: RePEc:eee:jfinec:v:110:y:2013:i:1:p:164-184
    DOI: 10.1016/j.jfineco.2013.04.012
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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