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Risk premia and seasonality in commodity futures

Author

Listed:
  • Hevia, Constantino

    () (Universidad Torcuato di Tella)

  • Petrella, Ivan

    () (Bank of England)

  • Sola, Martin

    () (Universidad Torcuato di Tella)

Abstract

​We develop and estimate a multifactor affine model of commodity futures that allows for stochastic variations in seasonality. We show conditions under which the yield curve and the cost-of-carry curve adopt augmented Nelson and Siegel functional forms. This restricted version of the model is parsimonious, does not suffer from identification problems, and matches well the yield curve and futures curve over time. We estimate the model using heating oil futures prices over the period 1984–2012. We find strong evidence of stochastic seasonality in the data. We analyse risk premia in futures markets and discuss two traditional theories of commodity futures: the theory of storage and the theory of normal backwardation. The data strongly supports the theory of storage.

Suggested Citation

  • Hevia, Constantino & Petrella, Ivan & Sola, Martin, 2016. "Risk premia and seasonality in commodity futures," Bank of England working papers 591, Bank of England.
  • Handle: RePEc:boe:boeewp:0591
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Anthony Garratt & Shaun P. Vahey & Yunyi Zhang, 2019. "Real‐time forecast combinations for the oil price," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(3), pages 456-462, April.
    2. Garratt, Anthony & Petrella, Ivan, 2019. "Commodity Prices and Inflation Risk," EMF Research Papers 23, Economic Modelling and Forecasting Group.
    3. repec:eee:ecosta:v:12:y:2019:i:c:p:78-145 is not listed on IDEAS
    4. Robert Czudaj, 2019. "Dynamics between trading volume, volatility and open interest in agricultural futures markets: A Bayesian time-varying coefficient approach," Chemnitz Economic Papers 030, Department of Economics, Chemnitz University of Technology, revised May 2019.

    More about this item

    Keywords

    Commodity futures; Nelson and Siegel; seasonality; risk premium; theory of storage;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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