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Commodities and the Market Price of Risk

  • Shaun K. Roache
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    Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton's (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/221.

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    Length: 23
    Date of creation: 01 Sep 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/221
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