Commodity Futures Prices: More Evidence on Forecast Power, Risk Premia and the Theory of Storage

Abstract:     
In this paper, we extend previous studies and test two commodity futures pricing theories. We strengthen their testing power by extending the sample period and including more commodities for consideration. We find enhanced evidence for seasonality in the basis, which supports the theory of storage. The power of the basis to forecast subsequent price changes is also strengthened, while the results on the presence or otherwise of a risk premium are still not conclusive. Moreover, we show that we cannot attribute the forecasting power of commodity futures to the extent to which they exhibit seasonality. The paper also examines whether there are time-varying parameters or structural breaks in these relationships. In most cases where structural breaks occur, only parallel movements are detected, illustrating that the forecasting power of the basis is stable over the different economic environments investigated.

Number of Pages in PDF File: 33

Keywords: commodity futures, theory of storage, risk premia

JEL Classification: G13

Accepted Paper Series