Expected Commodity Futures Returns

Abstract

In this article, we posit an empirical beta pricing model of expected commodity futures returns to explore predictable variation in their returns. Our model allows commodity futures returns to vary with the holdings of hedgers and allows these holdings to vary with business conditions. The model also allows for time variation in expected returns with relative scarcity of the commodity. Our evidence suggests that a large portion of the predictable variation in futures returns is explainable by these asset specific factors and that movements in these factors are related to macroeconomic variables. This evidence is consistent with rational return predictability.

Keywords: commodity futures pricing, multifactor models, conditional asset pricing

JEL Classification: G12, G13