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Predicting Commodity‐futures Basis Factor Return by Basis Spread
Author(s) -
Kim Daehwan
Publication year - 2015
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12100
Subject(s) - futures contract , basis (linear algebra) , predictability , econometrics , economics , futures market , commodity , quartile , financial economics , basis point , statistics , mathematics , monetary economics , finance , confidence interval , geometry , interest rate
A growing body of literature confirms the significance of the commodity futures basis factor. It has a significantly positive premium and it explains the cross‐section of commodity‐futures excess returns. We extend the literature by documenting the predictive relation between this factor and the inter‐quartile spread in the basis; the predictability of the basis factor return has not been previously reported. From the simple regression analysis of the historical commodity futures data we show that the basis spread is a strong predictor of the basis factor return. We discuss the implication of this finding on the nature of the basis factor; we also discuss the market timing strategies based on the basis spread.