Posted: 16 Mar 2017
Date Written: March 14, 2017
Using 10-year option and future data of global market, the risk-neutral skewness, estimated by model-free method has been found with the ability of pricing the average cross-sectional return in the global commodity future market, generating extra 8.3% return annually. The higher (lower) current risk-neutral skewness, the lower (higher) the subsequent return. The two-step regression shows that risk-neutral skewness has negative relation on the future return. This result is robust to scenarios in which traditional risk factors and recent new risk factors like total skewness, idiosyncratic skewness and volatility of return have been considered. Bootstrap simulation is applied to confirm that no single product has extra significant alpha when then new parsimonious risk factor is concerned. Moreover, risk-neutral skewness is found with the predictability regarding the future macroeconomics factors like bond return, default risk as well as TED spread.
Keywords: Asset pricing, Risk-Neutral, Skewness, Factors, Bootstrap
JEL Classification: C52, C53, G12, G13
Suggested Citation: Suggested Citation
Liu, Zhenya and Tang, Weiqing, A Parsimonious Risk Factor Model for Global Commodity Future Market (March 14, 2017). Available at SSRN: https://ssrn.com/abstract=2933256