Commodities and the Market Price of Risk

Author/Editor:

Shaun K. Roache

Publication Date:

September 1, 2008

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton's (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.

Series:

Working Paper No. 2008/221

Subject:

Commodities Futures Market risk Real interest rates Return on investment

English

Publication Date:

September 1, 2008

ISBN/ISSN:

9781451870794/1018-5941

Stock No:

WPIEA2008221

Pages:

23

Please address any questions about this title to publications@imf.org