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The Fundamentals of Commodity Futures Returns

Gary Gorton, Fumio Hayashi and K. Rouwenhorst

No 13249, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.

JEL-codes: G1 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-rmg
Date: 2007-07
Note: AP
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Published as Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.

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Journal Article: The Fundamentals of Commodity Futures Returns (2013) Downloads
Working Paper: The Fundamentals of Commodity Futures Returns (2008) Downloads
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