Commodity Risks and the Cross-Section of Equity Returns
38 Pages Posted: 2 Sep 2014 Last revised: 20 May 2019
Date Written: July 1, 2015
The article examines whether commodity risk is priced in the cross-section of global equity returns. We employ a long-only equally-weighted portfolio of commodity futures and a term structure portfolio that captures phases of backwardation and contango as mimicking portfolios for commodity risk. We find that equity-sorted portfolios with greater sensitivities to the excess returns of the backwardation and contango portfolio command higher average excess returns, suggesting that when measured appropriately, commodity risk is pervasive in stocks. Our conclusions are robust to the addition to the pricing model of financial, macroeconomic and business cycle-based risk factors.
Keywords: Long-only commodity portfolio, term structure portfolio, commodity risk, cross-section of equity returns
JEL Classification: G11, G13
Suggested Citation: Suggested Citation