Understanding the Sources of Risk Underlying the Cross Section of Commodity Returns

Gurdip Bakshi (), Xiaohui Gao () and Alberto G. Rossi ()
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Gurdip Bakshi: Smith School of Business, University of Maryland, College Park, Maryland 20742
Xiaohui Gao: Smith School of Business, University of Maryland, College Park, Maryland 20742
Alberto G. Rossi: Smith School of Business, University of Maryland, College Park, Maryland 20742

Management Science, 2019, vol. 65, issue 2, 619-641

Abstract: We show that a model featuring an average commodity factor, a carry factor, and a momentum factor is capable of describing the cross-sectional variation of commodity returns. More parsimonious one- and two-factor models that feature only the average and/or carry factors are rejected. To provide an economic interpretation, we show that innovations in global equity volatility can price portfolios formed on carry, while innovations in a commodity-based measure of speculative activity can price portfolios formed on momentum. Finally, we characterize the relation between the factors and the investment opportunity set.

Keywords: commodity asset pricing models; carry; momentum; innovations in equity volatility; speculative activity (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (67)

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