The Fundamentals of Commodity Futures Returns
Gary B. Gorton
Yale School of Management; National Bureau of Economic Research (NBER)
Hitotsubashi University; National Bureau of Economic Research (NBER)
K. Geert Rouwenhorst
Yale School of Management - International Center for Finance
NBER Working Paper No. w13249
Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.
Number of Pages in PDF File: 63working papers series
Date posted: July 13, 2007
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