The Fundamentals of Commodity Futures Returns

62 Pages Posted: 28 Jun 2007 Last revised: 7 Feb 2012

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

Fumio Hayashi

National Graduate Institute for Policy Studies

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2012

Abstract

Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories. The convenience yield is a decreasing, non-linear function of inventories. Price measures, such as the futures basis, prior futures returns, prior spot returns, and spot price volatilities reflect the state of inventories and are informative about commodity futures risk premiums. We verify these theoretical predictions using a comprehensive dataset on 31 commodity futures and physical inventories between 1971 and 2010. While the positions of participants in futures markets vary with both returns and the state of inventories, we find no evidence that they predict risk premiums on commodity futures.

Keywords: Commodity, Futures, Theory of Storage, Inventories, Backwardation, Hedging Pressure, Futures Trading

JEL Classification: G13, M41

Suggested Citation

Gorton, Gary B. and Hayashi, Fumio and Rouwenhorst, K. Geert, The Fundamentals of Commodity Futures Returns (February 7, 2012). Yale ICF Working Paper No. 07-08. Available at SSRN: https://ssrn.com/abstract=996930

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fumio Hayashi

National Graduate Institute for Policy Studies ( email )

Roppongi 7-22-1
Minato-ku
Tokyo, 106-0032
Japan

HOME PAGE: http://https://sites.google.com/site/fumiohayashi/home

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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