Speculator Spreading Pressure and the Commodity Futures Risk Premium

WBS Finance Group Research Paper

WFA 2020 Annual Meeting

76 Pages Posted: 28 Jul 2020 Last revised: 25 Feb 2022

See all articles by Yujing Gong

Yujing Gong

Systemic Risk Centre, London School of Economics

Arie Eskenazi Gozluklu

University of Warwick

Gi H. Kim

Warwick Business School - University of Warwick

Date Written: January 30, 2021

Abstract

This paper investigates the impact of speculative trading on the commodity futures risk premium. We focus on speculators’ spread positions, and study the asset pricing implications of spreading pressure on the cross-section of commodity futures returns. In an era of financialization of commodity markets, a long-short portfolio based on the spreading pressure signal carries a significant risk premium. We show that spreading pressure reflects speculators’ expectations about the change in the shape of the futures term structure, which is linked to commodity index investment. The spreading pressure factor can be explained by economic fundamentals and frictions introduced by financial traders.

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, Speculator Spreading Pressure and the Commodity Futures Risk Premium (January 30, 2021). 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 ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.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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