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
Date Written: November 5, 2015
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: Suggested Citation