Returns to Speculators in Commodity Futures Markets: A Comprehensive Revisit

Abstract

This study investigates the performance of large speculators in 22 commodity markets over the last 15 years. We find that large speculators were profitable in many markets. Two possible sources of returns are analyzed for their relevance in these gains: The ability to forecast and the flow of risk premia. In contrast to earlier studies we use direct test procedures for both assessments. We find very little evidence of market timing ability. However, employing the theory of storage and using a volatility measure to proxy for convenience yield, we observe consistent risk premium earnings. Furthermore, momentum may be seen as a third source of returns to speculative activity.

Keywords: Commodities, Returns to Speculators, Forecasting Ability, Risk Premium, Theory of Storage, Term Structure of Futures Prices

JEL Classification: G13, G14