A Parsimonious Risk Factor Model for Global Commodity Future Market

Posted: 16 Mar 2017  

Zhenya Liu

Renmin University of China

Weiqing Tang

University of Birmingham, Department of Economics, Students

Date Written: March 14, 2017

Abstract

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

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

Zhenya Liu

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

Weiqing Tang (Contact Author)

University of Birmingham, Department of Economics, Students ( email )

West Midlands
United Kingdom

Paper statistics

Abstract Views
223