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Factor Pricing in Commodity Futures and the Role of Liquidity

Terence Tai Leung Chong (), Chun Tsui and Wing Chan ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper empirically investigates the pricing factors and their associated risk premiums of commodity futures. Existing pricing factors in equity and bond markets, including market premium and term structure, are tested in commodity futures markets. Hedging pressure in commodity futures markets and momentum effects are also considered. While the literature has studied these factors separately, this study combines these factors to discuss their importance in explaining commodity future returns. One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been proven. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). The result of a significant liquidity premium suggests that liquidity is priced in commodity futures.

Keywords: Commodity Futures; risk premium; liquidity; momentum; roll yield. (search for similar items in EconPapers)
JEL-codes: G12 G13 G15 (search for similar items in EconPapers)
Date: 2017-02-24
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Journal Article: Factor pricing in commodity futures and the role of liquidity (2017) Downloads
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