Risk Premiums in the Cross-Section of Commodity Convenience Yields

Abstract

In this paper we investigate risk premiums in commodity convenience yields. The analysis consists of two steps. First, we use a three-factor model to extract monthly convenience yields from a broad sample of commodity futures. Second, we estimate multi-factor asset pricing models with conditional and unconditional betas and determine risk premiums embedded in those convenience yields. By analyzing monthly cross-sections of 22 commodities in the period between December 1990 and December 2007 (corresponding to a total of 28,877 traded futures prices) we provide supportive evidence of significant premiums in convenience yields for systematic risk factors associated to stock and bond investments. These risk premiums are found to be predictable by a set of economic instrumental variables.

Keywords: Commodity Futures, Convenience Yield, Term Structure, Risk Premiums, Predictability

JEL Classification: G12, G13, E44