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Risk Premia and Seasonality in Commodity Futures

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  • Constantino Hevia
  • Ivan Petrella
  • Martin Sola

Abstract

We develop and estimate a multifactor a¢ ne 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 su¤er from identi?cation 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 ?nd strong evidence of stochastic seasonality in the data.We analyze 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 support the theory of storage.

Suggested Citation

  • Constantino Hevia & Ivan Petrella & Martin Sola, 2016. "Risk Premia and Seasonality in Commodity Futures," Department of Economics Working Papers 2016_01, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpecon:2016_01
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    References listed on IDEAS

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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. Czudaj, Robert L., 2019. "Dynamics between trading volume, volatility and open interest in agricultural futures markets: A Bayesian time-varying coefficient approach," Econometrics and Statistics, Elsevier, vol. 12(C), pages 78-145.
    3. Garratt, Anthony & Petrella, Ivan, 2019. "Commodity Prices and Inflation Risk," EMF Research Papers 23, Economic Modelling and Forecasting Group.
    4. Spencer, Simon & Bredin, Don, 2019. "Agreement matters: OPEC announcement effects on WTI term structure," Energy Economics, Elsevier, vol. 80(C), pages 589-609.

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    More about this item

    Keywords

    Commodity Futures; Nelson and Siegel; Seasonality; Risk premium; Theory of storage.;
    All these keywords.

    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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