Recovering from Shocks: Term Structure Signalling in Commodity Markets

Abstract

We examine the behaviour of commodity term structures following economic shocks. The response of the futures curve in deferred, relative to front-month futures contracts, reflects market expectations about the type, magnitude, and persistence of a shock. Our novel measure, the term structure ratio, shows that market expectations have predictive power regarding the recovery time after a shock. The term structure ratio is related to a number of existing measures in the literature, including basis and basis momentum, but captures sufficient variation.

Keywords: Term structure, Commodity shocks, Market expectations, Market recovery

JEL Classification: Q40, Q41, O13