The Price of Commodity Risk in Stock and Futures Markets

54 Pages Posted: 18 Mar 2011 Last revised: 11 May 2014

Martijn Boons

New University of Lisbon - Nova School of Business and Economics

Frans de Roon

Tilburg University - Department of Finance

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)

Date Written: May 10, 2014

Abstract

We find that commodity risk is priced in the cross-section of US stock returns. Following the financialization of commodities, investors hedge commodity price risk directly in the futures market, primarily via commodity index investments, whereas before they gained commodity exposure mainly via the stock market. As a result, we find that the annualized average returns of high-minus-low commodity beta stocks change from -8% pre-financialization to 11% post-financialization. As stock market investors increasingly participate in commodity futures markets, stock market risk is also priced in the cross-section of commodity futures returns.

Keywords: Asset pricing, Commodity futures markets, Commodity index investment, Commodity risk premium, Hedging

JEL Classification: G11, G12, G13

Suggested Citation

Boons, Martijn and de Roon, Frans and Szymanowska, Marta, The Price of Commodity Risk in Stock and Futures Markets (May 10, 2014). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1785728 or http://dx.doi.org/10.2139/ssrn.1785728

Martijn Boons (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31104089607 (Phone)

HOME PAGE: http://www.rsm.nl/mszymanowska

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Paper statistics

Downloads
1,146
Rank
13,816
Abstract Views
6,198