Abstract - An Anatomy of Commodity Futures Risk Premiums

We decompose risk premiums in commodity futures in spot and term premiums, which can be
earned by investing in short term futures contracts and spreading strategies respectively. We show
that the average returns in commodity futures markets, which are often claimed to be zero, do not
imply the absence of risk premia. On the contrary, we find that spot and term premiums have
often opposite signs and the latter show a clear term structure. In addition, we find significant time variation in risk premiums, where spot premiums are primarily related to hedging pressure and term
premiums to the basis or current yield. These risk premiums cannot be captured by common asset
pricing models that explain stock and bond returns, indicating that these premiums are specific to
commodity markets.

Frans de Roon
Tilburg University
09.Feb 2010

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