Hazard Fear in Commodity Markets
65 Pages Posted: 30 Jun 2019
Date Written: June 28, 2019
We introduce a commodity futures return predictor related to fear about impending weather, disease, geopolitical and economic hazards that can shift the commodity supply or demand. Exploiting the commodity hazard-fear characteristic as a trading signal in a long-short portfolio framework, we find a sizeable and significant commodity premium. The hazard-fear premium reflects compensation for known factors such as basis, momentum and illiquidity risks, but is not subsumed by them. Exposure to hazard-fear is strongly priced in the cross-section of individual commodity futures returns and commodity portfolios beyond known risk factors. We identify a strong role for general investor sentiment in the commodity hazard-fear premium.
Keywords: Commodity futures; Long-short portfolios; Supply and Demand; Hazards; Fear; Search activity; Sentiment
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