The Commodity Futures Risk Premium: 1871–2018

47 Pages Posted: 20 Sep 2019 Last revised: 1 Oct 2019

See all articles by Geetesh Bhardwaj

Geetesh Bhardwaj

SummerHaven Investment Management

Rajkumar Janardanan

SummerHaven Investment Management

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Date Written: September 18, 2019

Abstract

Using a novel comprehensive database of 230 commodity futures that traded between 1871 and 2018, we document that futures prices have on average been set at a discount to future spot prices by about 5%. The historical risk premium is robust across commodity sectors and varies with the state of the economy, inflation and the level of scarcity. Although the majority of contracts are defunct, most commodities have earned a positive risk premium over their lifespan. We find empirical support for Gray’s conjecture that survival of futures contracts is correlated with the returns earned by investors. Finally, we provide out-of-sample evidence that “factor” strategies based on commodity basis and momentum have historically earned positive returns over time but are subject to prolonged drawdowns (crashes) that are not dissimilar to those experienced by the overall market.

Keywords: Commodity Futures, Commodity Risk Premium, Survival, Contract Failure, Momentum, Backwardation, Commodity Factors, Long-term data

JEL Classification: G12, G13, Q02

Suggested Citation

Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, The Commodity Futures Risk Premium: 1871–2018 (September 18, 2019). Available at SSRN: https://ssrn.com/abstract=3452255 or http://dx.doi.org/10.2139/ssrn.3452255

Geetesh Bhardwaj

SummerHaven Investment Management ( email )

Soundview Plaza,
1266 East Main Street
Stamford, CT 06902
United States

Rajkumar Janardanan

SummerHaven Investment Management ( email )

Soundview Plaza,
1266 East Main Street
Stamford, CT 06902
United States

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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