The Stock Market Price of Commodity Risk
New University of Lisbon - Nova School of Business and Economics
Frans De Roon
Tilburg University - Department of Finance
Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)
October 25, 2013
AFA 2012 Chicago Meetings Paper
We find that commodity risk is priced in the cross section of US stock returns. Following the Commodity Futures Modernization Act (CFMA) in 2000, investors can hedge commodity price risk directly in the futures market, primarily via commodity index investments, whereas before the CFMA they could gain commodity exposure mainly via the stock market. As a result, we find that the mean returns on high-minus-low commodity beta stocks changes from -8% per year pre-CFMA to 11% per year post-CFMA. In addition, as stock market investors increasingly participate in commodity future markets post-CFMA, we find that stock market risk also affects mean commodity futures returns.
Number of Pages in PDF File: 47
Keywords: Asset pricing, Commodity futures markets ,Commodity index investment, Commodity risk premium, Hedging
JEL Classification: G11, G12, G13working papers series
Date posted: March 18, 2011 ; Last revised: October 27, 2013
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