Convenience Yield Risk
54 Pages Posted: 31 Jan 2023
Date Written: January 28, 2023
We develop a framework to quantify the convenience yield risk (CYR) inherent to each commodity futures market. Implementing our approach, we document that our novel CYR measure is informative about future commodity returns. In panel regressions, the CYR predicts future returns with a positive sign. Economically, a strategy that opens long positions in commodity markets with a higher than median CYR signal and sells the remaining commodities yields an average return of 6.93% per year. The performance of the CYR strategy cannot be explained by exposure to existing commodity strategies or other variables that capture changes in the investment opportunity set.
Keywords: Commodity Risk Factors, Convenience Yield, Futures Curve, Return Predictability
JEL Classification: G12, Q02
Suggested Citation: Suggested Citation