Working Paper: NBER ID: w13249
Authors: Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst
Abstract: Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.
Keywords: Commodity Futures; Risk Premiums; Inventories; Theory of Storage
JEL Codes: G1; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inventory levels (D25) | Commodity futures risk premiums (G13) |
| Inventory levels (D25) | Expected future spot price volatility (G13) |
| Inventory levels (D25) | Convenience yield (D26) |
| Low inventories (E22) | Basis increases (E31) |
| Positions of futures market participants (G13) | Risk premiums (G19) |
| Inventory levels (D25) | Future average returns (G17) |