Expected Spot Prices and the Dynamics of Commodity Risk Premia
50 Pages Posted: 28 May 2016 Last revised: 22 Jun 2017
Date Written: June 22, 2017
We investigate the dynamics of the ex-ante risk premia for different commodities and maturities through the lens of a model of adaptive learning in which expected future spot prices are revised based on past prediction errors and changes in aggregate economic growth. The main results show that time-varying risk premia are predominantly driven by market activity and financial risks. More generally, we provide evidence of heterogeneity in the dynamics of factor loadings, both across commodities and time horizons. Finally, we show that the expectations generated by adaptive learning are consistent with the cross-sectional average of Bloomberg professional analysts' forecasts.
Keywords: Commodity Markets, Adaptive Expectations, Risk Premia, Empirical Asset Pricing, Survey Forecasts
JEL Classification: G12, G17, E44, C58
Suggested Citation: Suggested Citation