Relative Basis: A Better Measure of the Convenience Yield

Abstract

We propose a novel measure, dubbed “relative basis,” to better capture the commodity convenience yield. Our measure is the difference between the traditional near-term basis and a similarly defined distant basis. This simple differencing purges out persistent commodity characteristics in traditional basis, such as storage and financing costs. Relative basis is closely tied to changes in physical inventories and dominates traditional basis in forecasting commodity futures returns. In contrast, relative basis does not forecast the returns of financial futures, which are not subject to inventory constraints. Our results provide new insights into the well-known relation between basis and expected futures returns.

Keywords: commodity markets, futures basis, convenience yield, commodity futures returns, theory of storage

JEL Classification: G12, G13