52 Pages Posted: 21 Jun 2019 Last revised: 19 Nov 2019
Date Written: June 15, 2019
We propose a more precise measure for the convenience yield on commodity futures markets by taking the difference between the short-term basis and a similarly defined long-term basis. We label this measure “relative basis” and show that it is more closely related to the scarcity of inventories of individual commodities. In both Fama-MacBeth regression and portfolio sorting analysis, our relative basis measure subsumes the traditional basis measure in predicting commodity futures returns. Interestingly, for financial futures contracts, which are not subject to physical inventory constraints, the relative basis measure is no longer a significant predictor of subsequent futures returns, whereas the return predictability from the traditional basis measure becomes more significant and important.
Keywords: commodity futures, convexity, basis, inventory, convenience yield
JEL Classification: G12, G13
Suggested Citation: Suggested Citation