Investment shocks and the commodity basis spread

Fan Yang

Journal of Financial Economics, 2013, vol. 110, issue 1, 164-184

Abstract: I identify a “slope” factor in the cross section of commodity futures returns: high-basis commodity futures have higher loadings on this factor than low-basis commodity futures. Combined with a level factor (an index of commodity futures), this slope factor explains most of the average excess returns of commodity futures portfolios sorted by basis. More importantly, I find that this factor is significantly correlated with investment shocks, which represent the technological progress in producing new capital. I investigate a competitive dynamic equilibrium model of commodity production to endogenize this correlation. The model reproduces the cross-sectional futures returns and many asset pricing tests.

Keywords: Commodity futures; Investment-based asset pricing; Investment shocks; Basis spread (search for similar items in EconPapers)
JEL-codes: E23 E44 G12 G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (70)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:1:p:164-184

DOI: 10.1016/j.jfineco.2013.04.012

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