Abstract
Expectations about future economic activity should theoretically affect the demand for inventory holdings and therefore commodity spot and futures prices. Consistent with these predictions, we find that news related to future GDP growth is a significant factor that is priced in the cross section of commodity futures sorted by percentage net basis. The latter is highly correlated with inventories. In particular, it establishes that commodity futures with high inventory levels provide a hedge against risk associated with future GDP growth so that investors are willing to accept lower return. By contrast, those commodity futures with low inventory levels are inversely related to the GDP-related factor so that investors require a higher return. Such results suggest that commodity futures excess returns are a compensation for risk.
Original language | English |
---|---|
Pages (from-to) | 1887-1899 |
Number of pages | 13 |
Journal | Quantitative Finance |
Volume | 16 |
Issue number | 12 |
Early online date | 14 Sep 2016 |
DOIs | |
Publication status | Published - 2016 |
Keywords
- Commodity futures
- Percentage net basis
- Asset pricing
- News
- Gross domestic product
Profiles
-
Daniel Tsvetanov
- Norwich Business School - Associate Professor in Finance
- Finance Group - Member
Person: Research Group Member, Academic, Teaching & Research