Time-Varying Risk Premiums and Term Premiums in Commodity Futures
Posted: 28 Mar 2017
Date Written: March 28, 2017
Term premiums, defined as the excess return of long-dated contracts over short-dated contracts, in commodity futures are strongly predictable, both in the time series and in the cross section, by roll yield spreads. Strategies that exploit this predictability show sizable Sharpe ratios and are uncorrelated with strategies that exploit predictability in risk premiums using the basis in futures prices, that is, use contango and backwardation conditions in futures market to develop their strategies.
JEL Classification: G10, G11, G12, G13
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