Is Idiosyncratic Volatility Priced in Commodity Futures Markets?

30 Pages Posted: 1 Aug 2012 Last revised: 20 May 2019

See all articles by Adrian Fernandez-Perez

Adrian Fernandez-Perez

Auckland University of Technology

Ana-Maria Fuertes

Cass Business School, City University of London

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Date Written: May 23, 2016

Abstract

This article investigates the relationship between expected returns and past idiosyncratic volatility in commodity futures markets. Measuring the idiosyncratic volatility of 27 commodity futures contracts with traditional pricing models that fail to account for backwardation and contango leads to the puzzling finding that idiosyncratic volatility is significantly negatively priced cross-sectionally. However, idiosyncratic volatility is not priced when the phases of backwardation and contango are suitably factored in the pricing model. A time-series portfolio analysis similarly suggests that failing to recognize the fundamental risk associated with the inexorable phases of backwardation and contango leads to overstated profitability of the idiosyncratic volatility mimicking portfolios.

Keywords: Commodity futures; Idiosyncratic volatility; Backwardation; Contango

JEL Classification: G13, G14

Suggested Citation

Fernandez-Perez, Adrian and Fuertes, Ana-Maria and Miffre, Joelle, Is Idiosyncratic Volatility Priced in Commodity Futures Markets? (May 23, 2016). International Review of Financial Analysis, 2016, 46, 219-226 . Available at SSRN: https://ssrn.com/abstract=2120587 or http://dx.doi.org/10.2139/ssrn.2120587

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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