Commodity Futures Forecast Returns and Not Prices
72 Pages Posted: 7 Jun 2013 Last revised: 19 Oct 2013
Date Written: October 18, 2013
This paper investigates the forecastability of prices and returns in commodity futures markets. To examine the implications for models of commodity prices we derive a new canonical affine form that lends itself to model evaluation and comparison. Both regressions and model estimates imply that effectively all variation in the term structure of futures prices is due to time varying risk premiums and none to price forecasts. The model estimates further suggest that the economic quantity that links futures prices to storage -- the cost of carry -- is pinned down unambiguously by the data.
Keywords: Commodity, Futures, Return, Forecast, Carry, Slope, Basis
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