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
February 7, 2012
Yale ICF Working Paper No. 07-08
Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories. The convenience yield is a decreasing, non-linear function of inventories. Price measures, such as the futures basis, prior futures returns, prior spot returns, and spot price volatilities reflect the state of inventories and are informative about commodity futures risk premiums. We verify these theoretical predictions using a comprehensive dataset on 31 commodity futures and physical inventories between 1971 and 2010. While the positions of participants in futures markets vary with both returns and the state of inventories, we find no evidence that they predict risk premiums on commodity futures.
Number of Pages in PDF File: 62
Keywords: Commodity, Futures, Theory of Storage, Inventories, Backwardation, Hedging Pressure, Futures Trading
JEL Classification: G13, M41
Date posted: June 28, 2007 ; Last revised: February 7, 2012
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