Risk Premia and Seasonality in Commodity Futures
68 Pages Posted: 6 May 2016
Date Written: April 15, 2016
We develop and estimate a multifactor affine model of commodity futures that allows for stochastic variations in seasonality. We show conditions under which the yield curve and the cost-of-carry curve adopt augmented Nelson and Siegel functional forms. This restricted version of the model is parsimonious, does not suffer from identification problems, and matches well the yield curve and futures curve over time. We estimate the model using heating oil futures prices over the period 1984–2012. We find strong evidence of stochastic seasonality in the data. We analyse risk premia in futures markets and discuss two traditional theories of commodity futures: the theory of storage and the theory of normal backwardation. The data strongly supports the theory of storage.
Keywords: Commodity futures, Nelson and Siegel, seasonality, risk premium, theory of storage
JEL Classification: G13, E43, Q02, Q40
Suggested Citation: Suggested Citation