The Cross-Section of Commodity Futures Returns

40 Pages Posted: 15 Nov 2006 Last revised: 13 Mar 2010

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)

Date Written: March 9, 2010

Abstract

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

de Roon, Frans A. and Szymanowska, Marta, The Cross-Section of Commodity Futures Returns (March 9, 2010). Available at SSRN: https://ssrn.com/abstract=891073 or http://dx.doi.org/10.2139/ssrn.891073

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Marta Szymanowska (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Finance ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31104089607 (Phone)

HOME PAGE: http://www.rsm.nl/mszymanowska

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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