Commodity Risks and the Cross-Section of Equity Returns

38 Pages Posted: 2 Sep 2014 Last revised: 20 May 2019

See all articles by Chris Brooks

Chris Brooks

University of Reading - ICMA Centre

Adrian Fernandez-Perez

Auckland University of Technology

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Ogonna Nneji

University of Reading - ICMA Centre

Date Written: July 1, 2015

Abstract

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

Brooks, Chris and Fernandez-Perez, Adrian and Miffre, Joelle and Nneji, Ogonna, Commodity Risks and the Cross-Section of Equity Returns (July 1, 2015). British Accounting Review, Vol. 48, 134-150. Available at SSRN: https://ssrn.com/abstract=2490347 or http://dx.doi.org/10.2139/ssrn.2490347

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

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)

Joelle Miffre

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

Ogonna Nneji

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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