Commodity Risk Factors and the Cross-Section of Equity Returns

Chris Brooks, Adrian Fernandez-Perez, Joëlle Miffre and Ogonna Nneji
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Adrian Fernandez-Perez: Auckland University of Technology
Joëlle Miffre: EDHEC Business School, France
Ogonna Nneji: ICMA Centre, Henley Business School, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higher average returns. The two commodity portfolios are also found to explain part of the size, value and momentum anomalies. Conclusions regarding the pricing of the commodity risk factors are not an artifact driven by crude oil and are robust to the inclusion of financial and macroeconomic variables and to the addition of a composite leading indicator in the pricing model.

Keywords: Long-only commodity portfolio; term structure portfolio; commodity risk; cross-section of equity returns (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2014-09

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