Determinants and predictability of commodity producer returns

Qiao Wang and Ronald Balvers

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: We derive stock returns for firms producing nonrenewable commodities employing the investment-based asset pricing approach. By identifying the appropriate time-varying discount rate the investment-based approach allows an alternative test of the Hotelling Valuation Principle. The empirical results support the principle and enable predicting returns from sorting firms into quintiles by expected return, producing a 16–20% realized difference between top and bottom quintile. The return differences cannot be explained by standard risk factors or a commodity-specific factor, suggesting that an important risk factor is still missing from standard models. The approach permits cost-of-capital estimation that circumvents identifying systematic risk factors.

Keywords: Production-based asset pricing; Commodity price risk; Stock return; Predictability; Hotelling valuation principle; Commodity producers; Nonrenewable resources; Cost of capital determination (search for similar items in EconPapers)
JEL-codes: C38 G11 G12 G17 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s037842662100234x

DOI: 10.1016/j.jbankfin.2021.106278

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