Relative Basis

52 Pages Posted: 21 Jun 2019 Last revised: 19 Nov 2019

See all articles by Ming Gu

Ming Gu

Xiamen University - School of Economics

Wenjin Kang

Renmin University of China - Hanqing Institute

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Date Written: June 15, 2019

Abstract

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

Gu, Ming and Kang, Wenjin and Lou, Dong and Tang, Ke, Relative Basis (June 15, 2019). Available at SSRN: https://ssrn.com/abstract=3404561 or http://dx.doi.org/10.2139/ssrn.3404561

Ming Gu

Xiamen University - School of Economics ( email )

Xiamen, Fujian
China

Wenjin Kang

Renmin University of China - Hanqing Institute ( email )

59 Zhongguancun Street
Beijing, 100872
China

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ke Tang (Contact Author)

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China
13466777332 (Phone)

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