Futures risk premium
commodity futures risk premium. We focus on speculators' spread positions, and study the asset pricing implications of spreading pressure on the cross-section For instance, in the case of oil futures, the spot premium reflects oil price risk, while the term premia mainly reflect the risk present in the con- venience yield. Like Risk premia, electricity, futures. Page 4. Master thesis – Kasper Spitzen – 295161KS iii. Table of contents. The risk premium is estimated using a state-space model with a Kalman (1995) document that the risk premiums of commodity futures may be time-variant due
Crude oil and gold futures risk premia “We find that there is a significant difference between the risk premium in oil futures and the premium in gold futures. On average, the risk premium is negative for oil contracts, while it is positive for gold. Oil and gold have been perceived rather differently in financial markets.
The historical risk premium is robust across commodity sectors and varies with the state of the economy, inflation and the level of scarcity. Although the majority of contracts are defunct, most commodities have earned a positive risk premium over their lifespan. the commodity futures risk premium. A failure to account for hedging pressure results in the misleading conclusion that there is no risk premium or risk transfer in commodity futures markets and to the wrong impression that active commodity strategies provide abnormal positive returns. The historical risk premium is robust across commodity sectors and varies with the state of the economy, inflation and the level of scarcity. Although the majority of contracts are defunct, most commodities have earned a positive risk premium over their lifespan. The authors analyze the risk premium in commodity futures markets by deconstructing them into two primary risk factors: the spot premium, which is related to the risk in the underlying commodity, and the term premium, which is related to the changes in basis. “We find that there is a significant difference between the risk premium in oil futures and the premium in gold futures. On average, the risk premium is negative for oil contracts, while it is positive for gold. Oil and gold have been perceived rather differently in financial markets. While the oil risk premium is negative over large parts of the period covered by our data, it follows an upward trend during the 2000s and recently turns positive. commodity futures risk premium was the risk transfer or hedging pressure hypothesis of Keynes (1930) and Hicks (1939), where a risk premium accrued to speculators as a reward for accepting the price risk which hedgers sought to transfer. Abstract. 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.
FINANCIAL FUTURES CONTRACTS AND MARKETS. Given the default risk and liquidity problems in the interest-rate forward market, another solution to hedging
Abstract. 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 risk premium on the futures contract is set to compensate the marginal speculator for his setup cost and for the incremental risk associated with his futures position. To the extent that the futures contract is correlated with the stock market, the speculator can offset the risk of his futures position by shifting his position in the stock market by an amount negatively proportional to the contract's beta. A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. A risk premium is the return in excess of the risk-free rate of return that an investment is expected to yield. Using a novel comprehensive database of 230 commodity futures that traded between 1871 and 2018, we document that futures prices have on average been set at a discount to future spot prices by about 5%. The historical risk premium is robust across commodity sectors and varies with the state of the economy, inflation and the level of scarcity.
By going long a futures contract at a discount to the expected spot price, investors should achieve a positive excess return as the futures price converges to the spot price over time. Nicholas Kaldor's ‘theory of storage', from 1939, is an alternative view on the existence of a commodity risk premium.
tence and source of a commodity futures risk premium has been intense ever since the 1930s. The first hypothesis for the source of a commodity futures risk premium was the risk transfer or hedging pressure hypothesis of Keynes (1930) and Hicks (1939), where a risk premium accrued to speculators as a reward for accepting the price The Capital Asset Pricing Model (CAPM) modifies the above by quantifying the risk premium that is required to compensate the longs for the risk that they incur by entering a futures contract. So if a commodity poses a higher systematic risk, where its beta is greater than 1, then the future price must be lower than the expected spot price to By going long a futures contract at a discount to the expected spot price, investors should achieve a positive excess return as the futures price converges to the spot price over time. Nicholas Kaldor's ‘theory of storage', from 1939, is an alternative view on the existence of a commodity risk premium. Abstract. 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. tant because the two risk premia are likely to compensate for di§erent risk factors. For instance, in the case of oil futures, the spot premium reflects oil price risk, while the term premia mainly reflect the risk present in the convenience yield. Like risk premia in the futures contracts, and/or compared risk premiums for futures contracts on the same commodity but with different maturities (the term structure of commodity risk premiums). It is unlikely that risk premiums would be constant along a futures curve. For example, if speculators require a term premium
The Capital Asset Pricing Model (CAPM) modifies the above by quantifying the risk premium that is required to compensate the longs for the risk that they incur by entering a futures contract. So if a commodity poses a higher systematic risk, where its beta is greater than 1, then the future price must be lower than the expected spot price to
Risk premia, electricity, futures. Page 4. Master thesis – Kasper Spitzen – 295161KS iii. Table of contents. The risk premium is estimated using a state-space model with a Kalman (1995) document that the risk premiums of commodity futures may be time-variant due Basis risk is an important concept to understand in hedging. This is the price differential between the futures price and the physical commodity. is over (the cash price is above the futures price) it means that the market is a premium market or This note gives a brief overview of these alternative strategies, examines similarities and differences between managed futures and alternative risk premia Therefore, there must be a risk premium available to induce traders to take a position in the futures contract. Diagram showing how future prices change as the a risk premium are inconclusive. In addition, we show that the forecasting power of commodity futures cannot be attributed to the extent to which they exhibit
The risk premium is estimated using a state-space model with a Kalman (1995) document that the risk premiums of commodity futures may be time-variant due Basis risk is an important concept to understand in hedging. This is the price differential between the futures price and the physical commodity. is over (the cash price is above the futures price) it means that the market is a premium market or