Is news related to GDP growth a risk factor for commodity futures returns?

Abstract

Expectations about future economic activity should theoretically affect the demand for inventory holdings and therefore commodity spot and futures prices. Consistent with these predictions, we find that news related to future GDP growth is a significant factor that is priced in the cross-section of commodity futures sorted by percentage net basis. The latter is highly correlated with inventories. In particular, it establishes that commodity futures with high inventory levels provide a hedge against risk associated with future GDP growth so that investors are willing to accept lower return. By contrast, those commodity futures with low inventory levels are inversely related to the GDP-related factor so that investors require a higher return. Such results suggest that commodity futures excess returns are a compensation for risk.

Commodity momentum and reversal: Do they exist, and if so, why?

“…I argue that the differences in results between commodity futures and spot markets may stem from the fact that commodity spot returns are often proxied by pure capital gains. However, an appropriate definition of a commodity spot return should include not only the capital gain but also the net convenience yield, which is a latent payoff of holding a commodity that is similar to a dividend of a stock (see Pindyck, 1993; Tsvetanov et al, 2016). Ignoring the role of the net convenience yield in commodity spot returns may influence the observed momentum and reversal patterns.…”

Commodities as an Asset Class

“…Therefore, this latent payoff is the real money that can be collected by the counterpart on the futures markets and is already included in futures returns. 1 Accordingly, the commodity spot return should also include the net convenience yield to make economic sense (see e.g., Pindyck, 1993;Tsvetanov et al, 2016).…”

“…In contrast, I show that such differences might stem from the fact that the commodity spot returns are often proxied by pure capital gains. An appropriate definition of a commodity spot return should include the net convenience yield in addition to the capital gain, as argued by Pindyck (1993) and Tsvetanov et al (2016). The net convenience yield is the latent payoff of holding a commodity in excess of the storage cost, such as e.g.…”