Commodity Return Predictability: Evidence from Implied Variance, Skewness and their Risk Premia
46 Pages Posted: 5 Mar 2018 Last revised: 25 Apr 2019
Date Written: March 5, 2018
This paper investigates the role of realized and implied and their risk premia (variance and skewness) for commodities’ future returns. We estimate these moments from high frequency and commodity futures option data that results in forward-looking measures. Risk premia are computed as the difference between implied and realized moments. We highlight, from a cross-sectional and time series perspective, the strong positive relation between commodity returns and implied skewness. Moreover, we emphasize the high performance of skewness risk premium. Additionally, we show that their portfolios exhibit the best risk-return tradeoff. Most of our results are robust to other factors such as the momentum and roll yield.
Keywords: Commodity Forecast, Implied Volatility, Implied Skewness, Risk Premium
JEL Classification: G13, G17
Suggested Citation: Suggested Citation