Expectations, Fundamentals, and Asset Returns: Evidence from the Commodity Markets

72 Pages Posted: 25 Jun 2016 Last revised: 18 Oct 2016

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Jacopo Piana

City University London - Faculty of Finance

Date Written: October 17, 2016

Abstract

We study the links between expectations, fundamentals, and asset returns using the rich empirical setup offered by commodity markets. We find that survey-based expectations predict future fundamentals, but are not significant predictors of future returns. Expectations of returns are correlated with the slope of the commodity futures term structure and with trading flows. Furthermore, dispersion in analysts' forecasts helps in explaining the options implied volatility risk premium. Interestingly, time-series momentum exhibits a strong negative relation with survey-based expectations. We rationalize these findings using a simple model with heterogeneous beliefs, where professional forecasters can still have rational expectations.

Keywords: Survey expectations, commodity markets, return predictability, futures, options implied volatility

JEL Classification: G12, G13, G14, Q02

Suggested Citation

Beber, Alessandro and Piana, Jacopo, Expectations, Fundamentals, and Asset Returns: Evidence from the Commodity Markets (October 17, 2016). Available at SSRN: https://ssrn.com/abstract=2800172 or http://dx.doi.org/10.2139/ssrn.2800172

Alessandro Beber

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jacopo Piana (Contact Author)

City University London - Faculty of Finance ( email )

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

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