The Price of Commodity Risk in Stock and Futures Markets
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)
May 10, 2014
AFA 2012 Chicago Meetings Paper
We find that commodity risk is priced in the cross-section of US stock returns. Following the financialization of commodities, investors hedge commodity price risk directly in the futures market, primarily via commodity index investments, whereas before they gained commodity exposure mainly via the stock market. As a result, we find that the annualized average returns of high-minus-low commodity beta stocks change from -8% pre-financialization to 11% post-financialization. As stock market investors increasingly participate in commodity futures markets, stock market risk is also priced in the cross-section of commodity futures returns.
Number of Pages in PDF File: 54
Keywords: Asset pricing, Commodity futures markets, Commodity index investment, Commodity risk premium, Hedging
JEL Classification: G11, G12, G13
Date posted: March 18, 2011 ; Last revised: May 11, 2014
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