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Benchmarking commodity investments
Author(s) -
Blocher Jesse,
Cooper Ricky,
Molyboga Marat
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21885
Subject(s) - commodity , benchmarking , financialization , benchmark (surveying) , economics , financial economics , capital asset pricing model , risk premium , investment (military) , asset (computer security) , contango , futures contract , factor analysis , spot contract , commodity swap , econometrics , finance , computer science , computer security , management , geodesy , politics , political science , law , geography
While much is known about the financialization of commodities, less is known about how to profitably invest in commodities. We develop a four‐factor asset pricing model of commodity returns. Our four‐factor model prices both commodity spot and term risk premia in an intuitive manner related to investable portfolios. The straightforward construction of our factors is an improvement over previous models. Furthermore, our four‐factor model prices commodity risk premia using both sorted portfolios and risk adjusted alphas as benchmarks. Thus, we feel it is an appropriate benchmark to evaluate commodity investment vehicles.