The Cross-Section of Commodity Futures Returns
40 Pages Posted: 15 Nov 2006 Last revised: 13 Mar 2010
Date Written: March 9, 2010
In this paper we study consumption risk pricing in commodity futures markets. We find that, like stock returns, the conditional Consumption CAPM explains up to 60% of the cross sectional variation in mean futures returns. However, unlike stock returns, using contemporaneous plus future consumption growth reduces the performance of the model. We attribute this result to the fact that for commodities supply changes impact prices and therefore consumption. Consistent with this notion we find that production- and inventory-based factors are significant determinants of the long run risk in commodities markets, which may explain the poor performance of ultimate consumption risk model.
Keywords: futures, consumption-based model, ultimate consumption risk, production-based model
JEL Classification: G12, G13
Suggested Citation: Suggested Citation