Adaptive Expectations and Commodity Risk Premia

48 Pages Posted: 28 May 2016 Last revised: 9 Mar 2018

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Jacopo Piana

City University London - Faculty of Finance

Date Written: March 5, 2018

Abstract

We investigate the determinants of the commodity (ex-ante) risk premia for different 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 economic fundamentals. The main results show that risk premia are highly time varying and their dynamics is predominantly driven by hedging pressure and time-series momentum, conditional on a set of common predictors. Cumulative impulse-response functions from a panel VAR model show that these effects are persistent and not short-lived. Further, we provide evidence that the ex-ante spot premia is positively (negatively) correlated with the variance (skewness) of past realized returns, consistent with existing theoretical evidence. Finally, we show that adaptive expectations are broadly consistent with the cross-sectional average of a subset of Bloomberg professional analysts' forecasts.

Keywords: Commodity Markets, Adaptive Expectations, Empirical Asset Pricing, Hedging Pressure, Time-Series Momentum

JEL Classification: G12, G17, E44, C58

Suggested Citation

Bianchi, Daniele and Piana, Jacopo, Adaptive Expectations and Commodity Risk Premia (March 5, 2018). Available at SSRN: https://ssrn.com/abstract=2785563 or http://dx.doi.org/10.2139/ssrn.2785563

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Jacopo Piana

City University London - Faculty of Finance ( email )

Bunhill Row, 106
Department of Finance
London, EC1Y 8TZ
Great Britain

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