Idiosyncratic Skewness of Commodity Futures Returns

Abstract

We examine the ability of idiosyncratic skewness to explain the cross section of commodity futures returns at both the characteristic and factor levels. We find that idiosyncratic skewness negatively and significantly predicts cross-sectional commodity futures returns, and largely accounts for the skewness effect documented in previous studies. Furthermore, we find that a long/short trading strategy based on the idiosyncratic skewness generates significant abnormal returns, which cannot be explained by the traditional risk factors in commodity futures markets and persists up to 12 months. Moreover, idiosyncratic skewness appears to be a priced risk factor in commodity futures markets. Finally, we find that a novel asymmetry measure, IE, is better at capturing the effect of idiosyncratic skewness than the traditional measure.

Keywords: Idiosyncratic skewness; Cross section; Commodity futures returns; IE

JEL Classification: G11; G12; G13