Commodity Inflation Risk Premium and Stock Market Returns

2022 University of Rochester Conference in Econometrics, Paris December Finance Meeting 2022, 2023 Annual Meeting of the Swiss Society for Financial Market Research (SGF), FMA Annual Meeting 2022, FMA-Europe 2022, CFE Berlin 2023, EFMA 2022

Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022

89 Pages Posted: 21 Sep 2022 Last revised: 12 Feb 2024

See all articles by Ai Jun Hou

Ai Jun Hou

Stockholm University

Emmanouil Platanakis

University of Bath - School of Management

Xiaoxia Ye

University of Exeter Business School - Department of Finance

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: February 12, 2023

Abstract

We propose a novel measure of commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among the existing factors, and has substantial new information beyond them. Moreover, various aggregations of the individual cIRP predict stock market returns significantly, even after controlling for major economic predictors including the usual inflation measure. The link between commodities and the stock market is stronger than previously thought.

Keywords: Commodities, Term structure models, Predictability, Inflation risk premium, Cross-sectional asset pricing

JEL Classification: G10, G11, G12, G13

Suggested Citation

Hou, Ai Jun and Platanakis, Emmanouil and Ye, Xiaoxia and Zhou, Guofu, Commodity Inflation Risk Premium and Stock Market Returns (February 12, 2023). 2022 University of Rochester Conference in Econometrics, Paris December Finance Meeting 2022, 2023 Annual Meeting of the Swiss Society for Financial Market Research (SGF), FMA Annual Meeting 2022, FMA-Europe 2022, CFE Berlin 2023, EFMA 2022, Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=4213690 or http://dx.doi.org/10.2139/ssrn.4213690

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Emmanouil Platanakis (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Xiaoxia Ye

University of Exeter Business School - Department of Finance ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

HOME PAGE: http://www.xiaoxiaye.me/

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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