Review of Finance Vol. 21 No. 3 2017
Commodity Markets, Long-Run Predictability, and Intertemporal Pricing
Abstract
This article shows that commodity portfolios that capture the backwardation and contango phases exhibit in-sample and out-of-sample predictive power for the first two moments of the distribution of long-horizon aggregate equity market returns, and for the business cycle. It also demonstrates that a pricing model based on the corresponding backwardation and 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-horizon predictability. Backwardation and contango thus act as plausible investment opportunity state variables in the context of Merton’s (1973) intertemporal capital asset pricing model.
- DOI
- 10.1093/rof/rfw034
- Volume
- 21
- Issue
- 3
- Pages
- 1159-1188
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref