Empirical Relationships in the Commodity Futures Markets as of Early 2014

Abstract

This article revisits a number of empirical relationships in the oil and commodity index futures markets. For example, the article examines how to put roll yields in proper perspective, which is that they are most properly seen as predictive of future returns over sufficiently long timeframes. But what then drives roll yields? The article examines this question primarily within the crude oil futures markets since, at least historically, oil has been the key return-generator and diversification-driver for a number of commodity indices, but most especially for the S&P GSCI index.

The paper also briefly covers another structural feature of the commodity futures markets that has potential for generating returns, and that is the returns due to rebalancing the components of a commodity futures portfolio or index. The article concludes by showing examples of empirical analyses where the diversification and inflation-hedging potential of oil and commodity futures indices becomes most apparent.

Keywords: commodity futures, backwardation, returns, roll yield, oil market

JEL Classification: G1, G11, Q41