Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage

Eugene F. Fama and Kenneth French

Chapter 4 in The World Scientific Handbook of Futures Markets, 2015, pp 79-102 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We examine two models of commodity futures prices. The theory of storage explains the difference between contemporaneous futures and spot prices (the basis) in terms of interest changes, warehousing costs, and convenience yields. We find evidence of variation in the basis in response to both interest rates and seasonals in convenience yields. The second model splits a futures price into an expected premium and a forecast of the maturity spot price. We find evidence of forecast power for 10 of 21 commodities and time-varying expected premiums for five commodities.

Keywords: Futures Markets; Pricing; Risk Management; Futures Trading; Stock Indexes; Interest Rates; Futures Prices; Portfolio Theory; Hedge Funds; Foreign Exchange (search for similar items in EconPapers)
Date: 2015
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Journal Article: Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage (1987)
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