Commodities and the Market Price of Risk

Shaun Roache

No 2008/221, IMF Working Papers from International Monetary Fund

Abstract: Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton's (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.

Keywords: WP; interest rate; risk premium; futures contract (search for similar items in EconPapers)
Pages: 23
Date: 2008-09-01
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Citations: View citations in EconPapers (25)

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