Spreading Positions and the Commodity Futures Risk Premium

WBS Finance Group Research Paper

WFA 2020 Annual Meeting

80 Pages Posted: 28 Jul 2020 Last revised: 5 Oct 2023

See all articles by Yujing Gong

Yujing Gong

Systemic Risk Centre, London School of Economics

Arie Eskenazi Gozluklu

University of Warwick - Finance Group

Gi H. Kim

Warwick Business School - University of Warwick

Date Written: January 16, 2023

Abstract

This paper investigates the impact of trading on the commodity futures risk premium. We focus on intra-commodity spreading positions and study its asset pricing implications on the cross-section of commodity futures returns. We provide evidence that spreaders arise as counterparties to index traders and spreading positions scaled by open interest (SP) negatively predict commodity futures excess returns associated with index pressure. A battery of empirical tests shows that SP help separate commodities that trade based on economic fundamentals from commodities that are subject to market frictions introduced via commodity index investments. We propose an SP factor, a long-short portfolio based on SP that is priced in the commodity futures market, even after controlling for well-known factors, and is robust to accounting for omitted variable biases and measurement errors.

Keywords: commodity financialization, speculative spread trades, commodity futures term structure

JEL Classification: G10, G13, G23

Suggested Citation

Gong, Yujing and Gozluklu, Arie Eskenazi and Kim, Gi Hyun, Spreading Positions and the Commodity Futures Risk Premium (January 16, 2023). WBS Finance Group Research Paper, WFA 2020 Annual Meeting, Available at SSRN: https://ssrn.com/abstract=3610694 or http://dx.doi.org/10.2139/ssrn.3610694

Yujing Gong

Systemic Risk Centre, London School of Economics ( email )

United Kingdom

Arie Eskenazi Gozluklu (Contact Author)

University of Warwick - Finance Group ( email )

Warwick Business School
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.ariegozluklu.com

Gi Hyun Kim

Warwick Business School - University of Warwick ( email )

Coventry CV4 7AL
United Kingdom
+44 (0)24 7652 3849 (Phone)

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