The predictive performance of commodity futures risk factors

Ahmed, Shamim; Tsvetanov, Daniel

Abstract

This paper investigates the time-series predictability of commodity futures excess returns from factor models that exploit two risk factors – the equally weighted average excess return on long positions in a universe of futures contracts and the return difference between the high- and low-basis portfolios. Adopting a standard set of statistical evaluation metrics, we find weak evidence that the factor models provide out-of-sample forecasts of monthly excess returns significantly better than the benchmark of random walk with drift model. We also show, in a dynamic asset allocation environment, that the information contained in the commodity-based risk factors does not generate systematic economic value to risk-averse investors pursuing a commodity stand-alone strategy or a diversification strategy.

Citation

Ahmed, S., & Tsvetanov, D. (2016). The predictive performance of commodity futures risk factors. Journal of Banking and Finance, 71, 20-36. https://doi.org/10.1016/j.jbankfin.2016.06.011

• Journal Article Type: Article
• Acceptance Date: Jun 21, 2016
• Online Publication Date: Jul 9, 2016
• Publication Date: Oct 1, 2016
• Deposit Date: Oct 17, 2016
• Publicly Available Date: Oct 17, 2016
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Electronic ISSN: 1872-6372
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 71
• Pages: 20-36
• DOI: https://doi.org/10.1016/j.jbankfin.2016.06.011
• Keywords: Commodity markets; Futures pricing; Out-of-sample predictability; Economic value; Time series; Econometric models
• Public URL: https://nottingham-repository.worktribe.com/output/974541
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S0378426616301121