Capturing the Risk Premium of Commodity Futures
Author | : Devraj Basu |
Publisher | : |
Total Pages | : 37 |
Release | : 2015 |
ISBN-10 | : OCLC:1290218197 |
ISBN-13 | : |
Rating | : 4/5 (97 Downloads) |
Book excerpt: We construct long-short factor mimicking portfolios that capture the hedging pressure risk premium of commodity futures. We consider single sorts based on the open interests of either hedgers or speculators, as well as double sorts based on both positions. The long-short hedging pressure portfolios are priced cross-sectionally and offer Sharpe ratios that systematically exceed those of long-only benchmarks. Further tests show that the hedging pressure risk premiums rise with the volatility of commodity futures markets and that the predictive power of hedging pressure over cross-sectional commodity futures returns is different from the previously documented forecasting power of past returns and the slope of the term structure.