Commodity Futures Prices: More Evidence on Forecast Power, Risk Premia and the Theory of Storage

35 Pages Posted: 25 Oct 2011 Last revised: 29 Dec 2013

See all articles by Chris Brooks

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Yingying Wu

Xi'an Jiaotong Liverpool University

Date Written: January 13, 2013

Abstract

In this paper, we examine the temporal stability of the evidence for two commodity futures pricing theories. We investigate whether the forecast power of commodity futures can be attributed to the extent to which they exhibit seasonality and we also consider whether there are time varying parameters or structural breaks in these pricing relationships. Compared to previous studies, we find stronger evidence of seasonality in the basis, which supports the theory of storage. The power of the basis to forecast subsequent price changes is also strengthened, while results on the presence of a risk premium are inconclusive. In addition, we show that the forecasting power of commodity futures cannot be attributed to the extent to which they exhibit seasonality. We find that in most cases where structural breaks occur, only changes in the intercepts and not the slopes are detected, illustrating that the forecast power of the basis is stable over different economic environments.

Keywords: commodity futures, theory of storage, risk premia

JEL Classification: G13

Suggested Citation

Brooks, Chris and Prokopczuk, Marcel and Prokopczuk, Marcel and Wu, Yingying, Commodity Futures Prices: More Evidence on Forecast Power, Risk Premia and the Theory of Storage (January 13, 2013). Quarterly Review of Economics and Finance, Vol. 53, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=1948608 or http://dx.doi.org/10.2139/ssrn.1948608

Chris Brooks

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Yingying Wu

Xi'an Jiaotong Liverpool University ( email )

111 Ren’ai Road,
Suzhou Lake Higher Education Town,
Suzhou, Jiangsu 215123
China
(+86) (0)512-81884826 (Phone)
(+86) (0)512-88161730 (Fax)

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