Predicting Commodity-Futures Basis Factor Return by Basis Spread

40 Pages Posted: 1 Sep 2012 Last revised: 24 Jul 2014

Date Written: July 24, 2014

Abstract

A growing body of literature confirms the significance of the commodity futures basis factor: It has a significantly positive premium and it explains the cross-section of commodity-futures excess returns. We extend the literature by documenting predictive relation between this factor and the inter-quartile spread in the basis. Using commodity futures market data between 1972 and 2011, we show that the basis spread is a strong predictor of the basis factor return. Our finding supports the insight from recent theoretical models that economy-wide production shock affects the commodity market risk premium through the basis.

Keywords: Commodity futures, basis factor, predictability, inverse basis spread, decomposition, return dispersion

JEL Classification: G10, G12, G13

Suggested Citation

Kim, Daehwan, Predicting Commodity-Futures Basis Factor Return by Basis Spread (July 24, 2014). Available at SSRN: https://ssrn.com/abstract=2139416 or http://dx.doi.org/10.2139/ssrn.2139416

Daehwan Kim (Contact Author)

Konkuk University ( email )

1 Hwayang-dong
Kwangjin-gu
Seoul, 143-701
Korea

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