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Macroeconomic Influences and the Variability of the Commodity Futures Basis
Author(s) -
BAILEY WARREN,
CHAN K. C.
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04727.x
Subject(s) - futures contract , economics , bond , explanatory power , portfolio , financial economics , commodity , spot contract , stock (firearms) , asset (computer security) , econometrics , monetary economics , finance , mechanical engineering , philosophy , computer security , epistemology , computer science , engineering
We provide evidence that the spread between commodity spot and futures prices (the basis) reflects the macroeconomic risks common to all asset markets. The basis of many commodities is correlated with the stock index dividend yield and corporate bond quality spread. Explanatory power is related to exposure to macroeconomic fluctuations: about 40 percent of the variation in the basis of a portfolio of commodities with high business cycle sensitivity is explained by the stock and bond yields. Further diagnostics indicate that these associations are largely due to the presence of risk premiums, rather than spot price forecasts, in the basis.