Commodity Return Predictability

54 Pages Posted: 3 Feb 2017 Last revised: 10 Jul 2018

See all articles by Regina Hammerschmid

Regina Hammerschmid

University of Zurich; Swiss Finance Institute

Date Written: June 26, 2018


The futures curve of an aggregate commodity portfolio is time-varying and changes from upward (contango) to downward sloping (backwardation) which implies negative or positive expected returns. The basis arises as a natural fundamental to predict commodity returns. However, the empirical evidence at the aggregate portfolio level is very weak. I construct a factor based on different forward rates along the futures curve and find that commodity returns are predictable. Economic fundamentals, such as industrial production or global trade, positively predict aggregate commodity returns and used jointly with this forward rates factor significantly improve overall predictability in- and out-of-sample. I find evidence that expected aggregate commodity returns are procyclical. When economic activity is high, the commodity yield curve tends to be inverted and expected returns are high.

Keywords: Commodities, Return Predictability, Economic Fundamentals

JEL Classification: G11, G12, G17

Suggested Citation

Hammerschmid, Regina, Commodity Return Predictability (June 26, 2018). Available at SSRN: or

Regina Hammerschmid (Contact Author)

University of Zurich ( email )

Sch├Ânberggasse 1
Z├╝rich, 8001

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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