A Joint Affine Model of Commodity Futures and US Treasury Yields

47 Pages Posted: 8 Mar 2015

See all articles by Michael Chin

Michael Chin

Allocation Strategy Ltd.

Zhuoshi Liu

Bank of England - Monetary Analysis

Date Written: March 6, 2015

Abstract

We derive a general joint affine term structure model of US government bond yields and the convenience yields on physical commodities. We apply this framework separately to oil and gold. Our results show clear links between bond and commodity markets, since bond factors play a significant role in the pricing of the convenience yield term structure. Our framework allows us to decompose the term structure of futures prices into expectations of future spot prices and risk premia components. We estimate that the risk premium in oil futures has been negative over the 1980s and 1990s, and turned positive in the mid-2000s, consistent with a declining role for supply shocks in the oil market over this period. In contrast, we estimate that the gold risk premium is mostly positive throughout the sample period.

Keywords: Commodity futures, gold, oil, risk premium, convenience yields, affine term structure model, Treasury yields

JEL Classification: E43, G13, Q02, Q40

Suggested Citation

Chin, Michael and Liu, Zhuoshi, A Joint Affine Model of Commodity Futures and US Treasury Yields (March 6, 2015). Bank of England Working Paper No. 526, Available at SSRN: https://ssrn.com/abstract=2574771 or http://dx.doi.org/10.2139/ssrn.2574771

Michael Chin (Contact Author)

Allocation Strategy Ltd.

30 Welbeck Street
London, Non-US/Canada W1G 8ER
United Kingdom

Zhuoshi Liu

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

HOME PAGE: http://www.bankofengland.co.uk/research/Pages/economists/Zhuoshi-Liu.aspx

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
153
Abstract Views
947
Rank
396,616
PlumX Metrics