Do Futures Premiums Predict Commodity Producer Returns?

56 Pages Posted: 5 Sep 2020

See all articles by Qiao Wang

Qiao Wang

McMaster University - Michael G. DeGroote School of Business

Ronald J. Balvers

McMaster University - Michael G. DeGroote School of Business

Date Written: May 18, 2020

Abstract

We derive stock returns for firms producing nonrenewable commodities by employing the investment-based asset pricing approach. By identifying the appropriate time-varying discount rate the investment-based approach allows an alternative test of the Hotelling Valuation Principle. The empirical results support the principle and enable predicting returns from sorting firms into quintiles by expected return, producing a 19 percent realized difference between top and bottom quintile. The return differences cannot be explained by standard systematic risk factors, suggesting that at least one important risk factor is missing from standard models. The approach permits cost-of-capital estimation that circumvents identifying systematic risk factors.

Keywords: Production-based asset pricing, Commodity futures, Stock return predictability, Hotelling Valuation Principle, Commodity producers, Nonrenewable resources, Cost of capital determination

JEL Classification: G12, G17, G11, C38

Suggested Citation

Wang, Qiao and Balvers, Ronald J., Do Futures Premiums Predict Commodity Producer Returns? (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3663412

Qiao Wang

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Ronald J. Balvers (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 x23969 (Phone)

HOME PAGE: http://profs.degroote.mcmaster.ca/business/balvers

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
31
Abstract Views
162
PlumX Metrics