On commodity market risk premiums: Additional evidence

Abstract

determined that these risk premiums did not exist. She argued that the Keynesian risk premiums may be measured by the systematic risk of futures markets. Since the beta coefficients she estimated were not significantly different from zero, she concluded that futures returns in the sample period did not conform to the Keynesian model.Recently, Carter, Rausser, and Schmitz (1983; hereafter CRS) criticized this earlier work by Dusak for using a misspecified model to determine the existence of risk premiums in commodity futures contracts. CRS suggest a more appropriate model and provide empirical results which differ from Dusak's, i. e., their beta coefficients are significant. However, Marcus (1984) has argued that CRS appear to have misspecified the model because of a substantial overstatement of the value of commodity weighting in the market portfolio. While Marcus argues persuasively, 'The determination of whether risk premiums exist or not in commodity futures contracts is central to the price discovery mechanism. Assuming an efficient futures market, Black (1976) has argued a major benefit of futures markets is that participants ran make production, storage, and process decisions by examining the patterns of future prices.

Risk and return in copper, platinum, and silver futures

“…The insignificant ai's also indicate no evidence of any excess returns. The results are very similar to that of Dusak (1973), Baxter, Conine, andTarnarkin (1989, andSo (1987) for agricultural commodity futures.…”

Normal backwardation is normal

“…At least for these futures, the theory of normal backwardation first proposed by Keynes in 1930 seems to apply. In particular, the results for the corn, soybeans, and wheat contracts that inspired a wide literature (Baxter et al, 1985;Carter et al, 1983;Dusak, 1973;Ehrhardt et al, 1987;Park et al, 1988;Young, 1991) strongly support the predictions of the normal backwardation theory. The premium for holding currency futures is negative, suggesting that the contango theory is valid in the foreign exchange futures market.…”

“…1 The results then indicate that, while the normal backwardation theory fails to describe the pricing of commodity futures (Baxter, Conine, & Tamarkin, 1985), it has some merits in explaining the relationship between risk and expected return in metal futures markets (Chang, Chen, & Chen, 1990).…”

Volatility persistence in metal returns: A FIGARCH approach

“…Carter et al (1983) report approximately half of the commodities studied exhibit significant positive levels of systematic risk. In replicating the Dusak (1973) study, Baxter, Conine, and Tamarkin (1985) construct a market portfolio consisting of 93.7% of the S&P500 stock index and 6.3% of the Dow Jones cash commodity index. While the studies discussed above examined agricultural and livestock commodities, Chang et al (1990) estimate the systematic risk levels associated with copper, platinum, and silver futures returns.…”