Commodity Inflation Risk Premium: Evidence from the Cross-Section of Commodity Futures

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

doi:10.2139/ssrn.4213690

Commodity Inflation Risk Premium: Evidence from the Cross-Section of Commodity Futures

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

Research output: Working paper / Preprint › Working paper

Abstract

We propose a novel measure of the commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP exhibits strong heterogeneity across commodities. As a characteristic, the cIRP captures forward-looking information in the futures markets and outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among all existing factors and it cannot be explained by other factors.

Original language	English
Pages	1-56
Number of pages	56
DOIs	https://doi.org/10.2139/ssrn.4213690
Publication status	In 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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10.2139/ssrn.4213690

Cite this

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abstract = "We propose a novel measure of the commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP exhibits strong heterogeneity across commodities. As a characteristic, the cIRP captures forward-looking information in the futures markets and outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among all existing factors and it cannot be explained by other factors. ",

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author = "Hou, {Ai Jun} and Emmanouil Platanakis and Xiaoxia Ye and Guofu Zhou",

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AB - We propose a novel measure of the commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP exhibits strong heterogeneity across commodities. As a characteristic, the cIRP captures forward-looking information in the futures markets and outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among all existing factors and it cannot be explained by other factors.

KW - Commodities

KW - Term structure models

KW - Predictability

KW - Inflation risk premium

KW - Cross sectional asset pricing

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Commodity Inflation Risk Premium: Evidence from the Cross-Section of Commodity Futures

Abstract

Keywords

ASJC Scopus subject areas

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