Understanding the Sources of Risk Underlying the Cross-Section of Commodity Returns

63 Pages Posted: 4 Apr 2015 Last revised: 13 Sep 2017

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business

Xiaohui Gao Bakshi

Fox School of Business, Temple University

Alberto G. Rossi

Georgetown University

Date Written: April 16, 2015

Abstract

We show that a model featuring an average commodity factor, a carry factor, and a momentum factor is capable of describing the cross-sectional variation of commodity returns. More parsimonious one- and two-factor models that feature only the average and/or carry factors are rejected. To provide an economic interpretation, we show that innovations in global equity volatility can price portfolios formed on carry, while innovations in a commodity-based measure of speculative activity can price portfolios formed on momentum. Finally, we characterize the relation between the factors and the investment opportunity set.

Keywords: Commodity asset pricing models, carry, momentum, innovations in equity volatility, speculative activity

JEL Classification: C23, C53, G11, G12, G13, C5, D24, D34

Suggested Citation

Bakshi, Gurdip S. and Gao, Xiaohui and Rossi, Alberto G., Understanding the Sources of Risk Underlying the Cross-Section of Commodity Returns (April 16, 2015). Forthcoming, Management Science. Available at SSRN: https://ssrn.com/abstract=2589057 or http://dx.doi.org/10.2139/ssrn.2589057

Gurdip S. Bakshi

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Xiaohui Gao

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States

Alberto G. Rossi (Contact Author)

Georgetown University ( email )

McDonough School of Business
Georgetown University
Washington, DC 20057
United States

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