Commodity Futures Return Predictability and Intertemporal Asset Pricing

55 Pages Posted: 23 Oct 2020 Last revised: 14 Jun 2021

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Emmanuel Eyiah-Donkor

Rennes School of Business

Valerio Potì

University College Dublin

Multiple version iconThere are 2 versions of this paper

Date Written: October 9, 2020


We find out-of-sample predictability of commodity futures excess returns using forecast combinations of 28 potential predictors. Such gains in forecast accuracy translate into economically significant improvements in certainty equivalent returns and Sharpe ratios for a mean-variance investor. Commodity return forecasts are closely linked to the real economy. Return predictability is countercyclical, and the combination forecasts of commodity returns have significantly positive predictive power for future economic activity. Two-factor models featuring innovations in each of the combination forecasts and the market factor explain a substantial proportion of the cross-sectional variation of commodity and equity returns. The associated positive risk prices are consistent with the Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973), given how the predictors forecast an increase in future economic activity in the time-series. Overall, combination forecasts act as state variables within the ICAPM, thus resurrecting a central role for macroeconomic risk in determining expected returns.

Keywords: Commodity futures returns; Predictability; Asset allocation; Macroeconomic risk; Intertemporal pricing

JEL Classification: C22, C53, G11, G12, G13

Suggested Citation

Cotter, John and Eyiah-Donkor, Emmanuel and Potì, Valerio, Commodity Futures Return Predictability and Intertemporal Asset Pricing (October 9, 2020). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 20-8, Available at SSRN: or

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

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University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Emmanuel Eyiah-Donkor (Contact Author)

Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35000

Valerio Potì

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin

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