Commodity Return Predictability: Evidence from Implied Variance, Skewness and their Risk Premia

46 Pages Posted: 5 Mar 2018 Last revised: 25 Apr 2019

Date Written: March 5, 2018

Abstract

This paper investigates the role of realized and implied and their risk premia (variance and skewness) for commodities’ future returns. We estimate these moments from high frequency and commodity futures option data that results in forward-looking measures. Risk premia are computed as the difference between implied and realized moments. We highlight, from a cross-sectional and time series perspective, the strong positive relation between commodity returns and implied skewness. Moreover, we emphasize the high performance of skewness risk premium. Additionally, we show that their portfolios exhibit the best risk-return tradeoff. Most of our results are robust to other factors such as the momentum and roll yield.

Keywords: Commodity Forecast, Implied Volatility, Implied Skewness, Risk Premium

JEL Classification: G13, G17

Suggested Citation

Finta, Marinela Adriana and Ornelas, Jose Renato Haas, Commodity Return Predictability: Evidence from Implied Variance, Skewness and their Risk Premia (March 5, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3134310 or http://dx.doi.org/10.2139/ssrn.3134310

Marinela Adriana Finta (Contact Author)

Singapore Management University ( email )

50 Stamford Road
Singapore, 178899
Singapore

Jose Renato Haas Ornelas

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

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