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Commodity Risk Factors and the Cross-Section of Equity Returns

Author

Listed:
  • Chris Brooks

    (ICMA Centre, Henley Business School, University of Reading)

  • Adrian Fernandez-Perez

    (Auckland University of Technology)

  • Joëlle Miffre

    (EDHEC Business School, France)

  • Ogonna Nneji

    (ICMA Centre, Henley Business School, University of Reading)

Abstract

The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higher average returns. The two commodity portfolios are also found to explain part of the size, value and momentum anomalies. Conclusions regarding the pricing of the commodity risk factors are not an artifact driven by crude oil and are robust to the inclusion of financial and macroeconomic variables and to the addition of a composite leading indicator in the pricing model.

Suggested Citation

  • Chris Brooks & Adrian Fernandez-Perez & Joëlle Miffre & Ogonna Nneji, 2014. "Commodity Risk Factors and the Cross-Section of Equity Returns," ICMA Centre Discussion Papers in Finance icma-dp2014-09, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2014-09
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    References listed on IDEAS

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    Cited by:

    1. Asche, Frank & Misund, Bård & Oglend, Atle, 2016. "Determinants of the Atlantic salmon futures risk premium," Journal of Commodity Markets, Elsevier, vol. 2(1), pages 6-17.
    2. Zaremba, Adam, 2016. "Strategies Based on Momentum and Term Structure in Financialized Commodity Markets," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 7(1), pages 31-46, January.

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    More about this item

    Keywords

    Long-only commodity portfolio; term structure portfolio; commodity risk; cross-section of equity returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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