Macroeconomic Fundamentals to the Commodity Risk Premium

14 Pages Posted: 8 Jun 2017

See all articles by Ling-Ni Boon

Ling-Ni Boon

Tilburg University

Florian Ielpo

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); Unigestion

Date Written: April 23, 2016

Abstract

This chapter aims to build a connection between commodities’ price movements and the growth level in industrial production in different economic regions. Commodities should only be incorporated in a diversified strategy as long they either have a poor correlation to standard assets such as equities, or offer an attractive risk premium. We demonstrate that the part of commodity return not attributed to the roll yield is related to economic activities in the U.S. and China. 40 to 50% of variation in commodities returns are explained by industrial production growth in those both regions. The slow-down of economic activity implies lower excess returns on commodities. Similar to the risk premium on equities and credit, the commodity risk premium is dependent on the economic environment. This finding casts doubt on both commodities’ diversification potential, and investor’s interest in this asset class in terms of expected risk premium, given the current low world structural growth.

Keywords: Commodities, risk premium, fundamentals, asset allocation

Suggested Citation

Boon, Ling-Ni and Ielpo, Florian, Macroeconomic Fundamentals to the Commodity Risk Premium (April 23, 2016). Available at SSRN: https://ssrn.com/abstract=2982479 or http://dx.doi.org/10.2139/ssrn.2982479

Ling-Ni Boon

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Florian Ielpo (Contact Author)

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

Unigestion ( email )

8c, avenue de Champel CP 387
CP 387
Genève 12, CH 1211
Switzerland

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