Is Idiosyncratic Volatility Priced in Commodity Futures Markets?
30 Pages Posted: 1 Aug 2012 Last revised: 20 May 2019
Date Written: May 23, 2016
Abstract
This article investigates the relationship between expected returns and past idiosyncratic volatility in commodity futures markets. Measuring the idiosyncratic volatility of 27 commodity futures contracts with traditional pricing models that fail to account for backwardation and contango leads to the puzzling finding that idiosyncratic volatility is significantly negatively priced cross-sectionally. However, idiosyncratic volatility is not priced when the phases of backwardation and contango are suitably factored in the pricing model. A time-series portfolio analysis similarly suggests that failing to recognize the fundamental risk associated with the inexorable phases of backwardation and contango leads to overstated profitability of the idiosyncratic volatility mimicking portfolios.
Keywords: Commodity futures; Idiosyncratic volatility; Backwardation; Contango
JEL Classification: G13, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Cross-Section of Volatility and Expected Returns
By Andrew Ang, Robert J. Hodrick, ...
-
The Cross-Section of Volatility and Expected Returns
By Andrew Ang, Robert J. Hodrick, ...
-
By Amit Goyal and Pedro Santa-clara
-
Stocks as Lotteries: the Implications of Probability Weighting for Security Prices
By Nicholas Barberis and Ming Huang
-
Stocks as Lotteries: The Implications of Probability Weighting for Security Prices
By Nicholas Barberis and Ming Huang
-
Equity Portfolio Diversification
By Alok Kumar and William N. Goetzmann
-
Equity Portfolio Diversification
By Alok Kumar and William N. Goetzmann
-
Idiosyncratic Risk and Security Returns
By Yexiao Xu and Burton G. Malkiel
-
High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence
By Andrew Ang, Robert J. Hodrick, ...
-
High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence
By Xiaoyan Zhang, Andrew Ang, ...