Commodity Inflation Risk Premium and Stock Market Returns

Ai Jun Hou, Emmanouil Platanakis, Xiaoxia Ye, Guofu Zhou

Research output: Working paper / PreprintWorking paper

Abstract

We propose a novel measure of commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among the existing factors, and has substantial new information beyond them. Moreover, various aggregations of the individual cIRP predict stock market returns significantly, even after controlling for major economic predictors including the usual inflation measure. The link between commodities and the stock market is stronger than previously thought.
Original languageEnglish
Pages1-106
Number of pages106
Publication statusIn preparation - 27 Mar 2024

Keywords

  • Commodities
  • Term structure models
  • Predictability
  • Inflation risk premium
  • Cross sectional asset pricing

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)
  • Finance

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