Commodity Markets, Long-Run Predictability and Intertemporal Pricing

Fernandez-Perez, A., Fuertes, A. & Miffre, J. (2016). Commodity Markets, Long-Run Predictability and Intertemporal Pricing. Review of Finance, doi: https://doi.org/10.1093/rof/rfw034

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Abstract

This paper 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 CAPM.

Item Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance, following peer review. The version of record, Fernandez-Perez, A., Fuertes, A. & Miffre, J. Commodity Markets, Long-Run Predictability and Intertemporal Pricing. Review of Finance, will be available online at: http://rof.oxfordjournals.org/
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/13601

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