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

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