Spreading Pressure and the Commodity Futures Risk Premium
WBS Finance Group Research Paper
WFA 2020 Annual Meeting
75 Pages Posted: 28 Jul 2020 Last revised: 17 Jan 2023
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 the asset pricing implications of spreading pressure (SP), that is, spreading positions scaled by open interest, on the cross-section of commodity futures returns. We document that SP negatively predicts futures excess returns. A battery of empirical tests shows that SP helps 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: Suggested Citation