Volatility Risk Premia and Future Commodities Returns

Abstract

This paper extends the empirical literature on volatility risk premium (VRP) and future returns by analyzing the predictive ability of commodity currency VRP and commodity VRP. The empirical evidence throughout this paper provides support for a positive relationship of commodity currencies VRP and future commodity returns, but only for the period after the 2008 global financial crisis. This predictability survives the inclusion of control variables like equity VRP and past currency returns. Furthermore, gold VRP also has the ability to predict future commodity returns. However, this predictability is restricted to precious metals when control variables are considered.

Paper produced as part of the BIS Consultative Council for the Americas Research Network project "The Commodity Cycle: Macroeconomic and Financial Stability Implications"

Keywords: Commodity predictability, Volatility risk premium, Commodity currencies

JEL Classification: Q02, G15, G17, F37