Premium
An Anatomy of Commodity Futures Risk Premia
Author(s) -
SZYMANOWSKA MARTA,
ROON FRANS,
NIJMAN THEO,
GOORBERGH ROB
Publication year - 2014
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/jofi.12096
Subject(s) - risk premium , futures contract , economics , portfolio , financial economics , market liquidity , volatility (finance) , momentum (technical analysis) , spot contract , econometrics , monetary economics
We identify two types of risk premia in commodity futures returns: spot premia related to the risk in the underlying commodity, and term premia related to changes in the basis. Sorting on forecasting variables such as the futures basis, return momentum, volatility, inflation, hedging pressure, and liquidity results in sizable spot premia between 5% and 14% per annum and term premia between 1% and 3% per annum. We show that a single factor, the high‐minus‐low portfolio from basis sorts, explains the cross‐section of spot premia. Two additional basis factors are needed to explain the term premia.