The predictive performance of commodity futures risk factors

Shamim Ahmed and Daniel Tsvetanov

Journal of Banking & Finance, 2016, vol. 71, issue C, 20-36

Abstract: This paper investigates the time-series predictability of commodity futures excess returns from factor models that exploit two risk factors – the equally weighted average excess return on long positions in a universe of futures contracts and the return difference between the high- and low-basis portfolios. Adopting a standard set of statistical evaluation metrics, we find weak evidence that the factor models provide out-of-sample forecasts of monthly excess returns significantly better than the benchmark of random walk with drift model. We also show, in a dynamic asset allocation environment, that the information contained in the commodity-based risk factors does not generate systematic economic value to risk-averse investors pursuing a commodity stand-alone strategy or a diversification strategy.

Keywords: Commodity markets; Futures pricing; Out-of-sample predictability; Economic value; Time series; Econometric models (search for similar items in EconPapers)
JEL-codes: F37 G11 G13 G17 Q02 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:71:y:2016:i:c:p:20-36

DOI: 10.1016/j.jbankfin.2016.06.011

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