Factor pricing in commodity futures and the role of liquidity

Abstract

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.

Does liquidity drive stock market returns? The role of investor risk aversion

“…where Ri,d is the return on stock i on day d in month t, VOLDi,d is the corresponding daily volume in US dollars, and Di is the number of days with data available for stock i in month t. The market illiquidity ratio is then calculated as the equally-weighted average of the Amihud ( 2002) illiquidity ratio of individual stocks over all sample stocks in the market. This widely used illiquidity measure outperforms other illiquidity proxies as it captures Kyle's lambda and has the largest correlation with liquidity benchmarks (Goyenko et al 2009;Marshall et al 2012;Mazouz et al 2014;Wang and Zhang 2015;Saad and Samet 2017;Chong et al 2017).…”

A functional time series analysis of forward curves derived from commodity futures

“…Forward curves derived from commodity futures are important for both academic researchers and financial practitioners. From the academic perspective, the information contained in the forward curves (such as shape, slope, roll-yield) are essential input factors in pricing models of commodities (Schwartz & Smith, 2000;Pilipovic, 2007;Chong et al, 2017) and predictive factors for futures returns (Gorton et al, 2013). They can also be related to volatility of spot and futures prices (Haugom & Ullrich, 2012;Kogan et al, 2009).…”