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Risk premia and seasonality in commodity futures
Author(s) -
Hevia Constantino,
Petrella Ivan,
Sola Martin
Publication year - 2018
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2631
Subject(s) - futures contract , seasonality , econometrics , commodity , economics , risk premium , affine transformation , convenience yield , hedge , stochastic modelling , financial economics , spot contract , mathematics , statistics , finance , ecology , pure mathematics , biology
Summary We develop and estimate a multifactor affine model of commodity futures that allows for stochastic seasonality. We document the existence of stochastic seasonal fluctuations in commodity futures and that properly accounting for the cost‐of‐carry curve requires at least three factors. We estimate the model using data on heating oil futures and analyze the contribution of the factors to risk premia. Correctly specifying seasonality as stochastic is important to avoid erroneously assigning those fluctuations to other risk factors. We also estimate a nonlinear version of the model that imposes the zero lower bound on interest rates and find similar results.