A joint affine model of commodity futures and US Treasury yields

Michael Chin and Zhuoshi Liu

No 526, Bank of England working papers from Bank of England

Abstract: We derive a general joint affine term structure model of US government bond yields and the convenience yields on physical commodities. We apply this framework separately to oil and gold. Our results show clear links between bond and commodity markets, since bond factors play a significant role in the pricing of the convenience yield term structure. Our framework allows us to decompose the term structure of futures prices into expectations of future spot prices and risk premia components. We estimate that the risk premium in oil futures has been negative over the 1980s and 1990s, and turned positive in the mid-2000s, consistent with a declining role for supply shocks in the oil market over this period. In contrast, we estimate that the gold risk premium is mostly positive throughout the sample period.

Keywords: Commodity futures; gold; oil; risk premium; convenience yields; affine term structure model; Treasury yields (search for similar items in EconPapers)
JEL-codes: E43 G13 Q02 Q40 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-03-06
New Economics Papers: this item is included in nep-fmk and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0526

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