Research and publications
Commodity Markets, Long-Run Predictability and Intertemporal Pricing
This paper shows that backwardation versus contango factor-mimicking portfolios exhibit in-sample and out-of-sample predictive power for the first two moments of the distribution of long-run aggregate market returns and for the business cycle. It also demonstrates that a pricing model based on innovations to the backwardation versus contango risk factors explains relatively well a wide cross-section of equity portfolios. The cross-sectional “hedging” risk prices are economically consistent with the direction of long-run predictability of expected market returns and variances. Backwardation and contango risk factors thus act as plausible investment opportunity state variables in the context of Merton’s (1973) Intertemporal CAPM.
Author(s):
Adrian Fernadez-Perez, Ana-Maria Fuertes, Joëlle Miffre
Summary:
This paper shows that backwardation versus contango factor-mimicking portfolios exhibit in-sample and out-of-sample predictive power for the first two moments of the distribution of long-run aggregate market returns and for the business cycle. It also demonstrates that a pricing model based on innovations to the backwardation versus contango risk factors explains relatively well a wide cross-section of equity portfolios. The cross-sectional “hedging” risk prices are economically consistent with the direction of long-run predictability of expected market returns and variances. Backwardation and contango risk factors thus act as plausible investment opportunity state variables in the context of Merton’s (1973) Intertemporal CAPM.
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Register/Log in| Type : | Working paper |
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| Date : | 31/07/2015 |
| Keywords : |
Commodities |
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