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Commodity Markets, Long-Run Predictability, and Intertemporal Pricing

Adrian Fernandez-Perez, Ana-Maria Fuertes () and Joelle Miffre

Review of Finance, 2017, vol. 21, issue 3, 1159-1188

Abstract: This article shows that commodity portfolios that capture the backwardation and contango phases exhibit in-sample and out-of-sample predictive power for the first two moments of the distribution of long-horizon aggregate equity market returns, and for the business cycle. It also demonstrates that a pricing model based on the corresponding backwardation and contango risk factors explains relatively well a wide cross-section of equity portfolios. The cross-sectional “hedging” risk prices are economically consistent with the direction of long-horizon predictability. Backwardation and contango thus act as plausible investment opportunity state variables in the context of Merton’s (1973) intertemporal capital asset pricing model.

Keywords: Commodities; Backwardation; Contango; Long-Run Predictability; Intertemporal Pricing (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2017
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