An Anatomy of Commodity Futures Risk Premia

Szymanowska, Marta; Roon, Frans de; Nijman, Theo; Goorbergh, Rob van den

doi:10.2139/ssrn.1343809

Cited by 88 publications

(148 citation statements)

References 10 publications

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“…However, exploiting this information is difficult in practice, because of the presence of a risk premium between the current futures price and the expected spot price of the underlying asset. Moreover, understanding this premium is very important; see [16]. Therefore, in this paper, we also show an out-of-sample analysis of the natural gas futures risk premia.…”

Section: Abstract and Applied Analysismentioning

confidence: 80%

The Jump Size Distribution of the Commodity Spot Price and Its Effect on Futures and Option Prices

Gómez-Valle

Habibilashkary

Martínez-Rodríguez

2017

Abstract and Applied Analysis

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In this paper, we analyze the role of the jump size distribution in the US natural gas prices when valuing natural gas futures traded at New York Mercantile Exchange (NYMEX) and we observe that a jump-diffusion model always provides lower errors than a diffusion model. Moreover, we also show that although the Normal distribution offers lower errors for short maturities, the Exponential distribution is quite accurate for long maturities. We also price natural gas options and we see that, in general, the model with the Normal jump size distribution underprices these options with respect to the Exponential distribution. Finally, we obtain the futures risk premia in both cases and we observe that for long maturities the term structure of the risk premia is negative. Moreover, the Exponential distribution provides the highest premia in absolute value.

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Section: Abstract and Applied Analysismentioning

confidence: 80%

The Jump Size Distribution of the Commodity Spot Price and Its Effect on Futures and Option Prices

Gómez-Valle

Habibilashkary

Martínez-Rodríguez

2017

Abstract and Applied Analysis

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“…Recent studies discover the important roles of the basis and momentum factors in pricing commodity futures (Bakshi et al 2014, Szymanowska et al 2014, and Yang 2013. Daskalaki et al (2014) on the other hand find that none of the asset pricing models based on macroeconomic or equity-motivated tradable factors including the liquidity level is successful in explaining individual commodity's returns.…”

Section: Literature Reviewmentioning

confidence: 99%

Factor pricing in commodity futures and the role of liquidity

Chong

Tsui

Chan

2017

Quantitative Finance

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This paper empirically investigates the pricing factors and their associated risk premiums of commodity futures. Existing pricing factors in equity and bond markets, including market premium and term structure, are tested in commodity futures markets. Hedging pressure in commodity futures markets and momentum effects are also considered. While the literature has studied these factors separately, this study combines these factors to discuss their importance in explaining commodity future returns. One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been proven. The risk premiums of two momentum factors and speculators' hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). The result of a significant liquidity premium suggests that liquidity is priced in commodity futures.

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“…For instance, Szymanowska et al [2014] construct similar strategies based on return differentials to isolate term premiums, but then sort commodities on the magnitude of the short-term yield, y t , (1) alone. As the third regression shows, the short-term yield contains some information about expected term premiums, but the t-statistic of -2.88 is approximately only half of the 5.44 obtained in the second regression, which uses the yield differential as the independent variable.…”

Section: Notes: This Exhibit Reports Annualized Average Returns Stanmentioning

confidence: 99%

Time-Varying Risk Premiums and Term Premiums in Commodity Futures

Chaves¹

2017

JAI

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T he term structure of futures prices has a strong impact on the returns earned by investors in those markets. For example, the literature shows that buying futures in backwardation and selling futures in contango is, on average, a profitable strategy. In other words, the risk premium of commodity futures is timevarying and can be forecasted by the slope of the term structure (basis or roll yield). 1In upward-sloping term structures (contango), contract prices have a tendency to fall as time passes and contracts approach expiration. In downward-sloping term structures (backwardation), the exact opposite argument is true: contract prices have a tendency to go up as contracts approach expiration.This article shows that the term structure of futures prices contains significantly more information than just its slope. As in the fixed-income literature, individual segments of the term structure can be used to extract the extra information. For instance, when the first segment of the term structure has a steeper slope than the second segment, this suggests that the price of the first contract has a stronger tendency to fall than the price of the second contract. A simple strategy to benefit from this configuration would be to hold a long position in the second contract and a short position in the first one. The expected return differential between the long-dated contract and the short-dated one is defined as the term premium-one of the main variables of interest in this article.From a practical point of view, we use commodity futures to study whether risk premiums and term premiums are predictable in the time series or in the cross section. Based on these results, we then proceed by constructing trading strategies that explore the predictability in risk and term premiums of different commodities, taking long positions in those with high expected values and short positions in those with low expected values. The Sharpe ratios of the trading strategies based on term premiums are significantly higher than the Sharpe ratios of the risk premium strategies usually studied in the literature (Erb and Harvey [2006], Gorton and Rouwenhorst [2006]). Moreover, these two types of trading strategies are uncorrelated; portfolios combining them enjoy significant diversification benefits and earn even higher Sharpe ratios.From a theoretical point of view, our predictability tests are motivated by a solid foundation developed in the fixed-income literature and extended here to investigate the term structure of futures contracts. This approach has two important benefits. First, it guides the selection of variables and significantly reduces the criticisms that our predictability tests and trading strategies are the result of data mining. Second, as we show later, even a lack of predictability in risk and term premiums would be interesting theoretically, because it indicates strong predictability in other important variables, such as changes in spot prices and changes in the basis. Fama and French [1987] divided the theories of commodity fu...

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An Anatomy of Commodity Futures Risk Premia

Cited by 88 publications

References 10 publications

The Jump Size Distribution of the Commodity Spot Price and Its Effect on Futures and Option Prices

The Jump Size Distribution of the Commodity Spot Price and Its Effect on Futures and Option Prices

Factor pricing in commodity futures and the role of liquidity

Time-Varying Risk Premiums and Term Premiums in Commodity Futures

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