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
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: Suggested Citation