Commodities and the Market Price of Risk
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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
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