Commodity Return Predictability: evidence from implied variance, skewness and their risk premia and their risk premia

Marinela Finta and Jose Ornelas

No 479, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper investigates the role of realized, implied and risk premium moments (variance and skewness) for commodities’ future returns. We estimate these moments from high frequency and commodity futures option data that results in forward-looking measures. Risk premium moments are computed as the difference between implied and realized moments. We highlight, from a cross-sectional and time-series perspective, the strong positive relation between commodity returns and implied skewness. Moreover, we emphasize the high performance of skewness risk premium. Additionally, we show that their portfolios exhibit the best risk-return tradeoff. Most of our results are robust to other factors such as the momentum and roll yield.

Date: 2018-07
New Economics Papers: this item is included in nep-rmg
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