Commodity Markets, Long-Run Predictability and Intertemporal Pricing

Review of Finance, 2017, 21, 3, 1159-1188

36 Pages Posted: 7 May 2014 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: November 5, 2015

Abstract

This paper shows that commodity portfolios that capture the backwardation and contango phases exhibit in-sample and out-of-sample predictive power for the first two moments of the distribution of long-horizon aggregate equity market returns, and for the business cycle. It also demonstrates that a pricing model based on the corresponding backwardation and contango risk factors explains relatively well a wide cross-section of equity portfolios. The cross-sectional “hedging” risk prices are economically consistent with the direction of long-horizon predictability. Backwardation and contango thus act as plausible investment opportunity state variables in the context of Merton’s (1973) intertemporal CAPM.

Keywords: Commodities; Backwardation; Contango; Long-Run Predictability; Intertemporal Pricing

JEL Classification: G13, G14

Suggested Citation

Fernandez-Perez, Adrian and Fuertes, Ana-Maria and Miffre, Joelle, Commodity Markets, Long-Run Predictability and Intertemporal Pricing (November 5, 2015). Review of Finance, 2017, 21, 3, 1159-1188 . Available at SSRN: https://ssrn.com/abstract=2432884 or http://dx.doi.org/10.2139/ssrn.2432884

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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