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Understanding the Sources of Risk Underlying the Cross Section of Commodity Returns

Author

Listed:
  • Gurdip Bakshi

    (Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Xiaohui Gao

    (Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Alberto G. Rossi

    (Smith School of Business, University of Maryland, College Park, Maryland 20742)

Abstract

We show that a model featuring an average commodity factor, a carry factor, and a momentum factor is capable of describing the cross-sectional variation of commodity returns. More parsimonious one- and two-factor models that feature only the average and/or carry factors are rejected. To provide an economic interpretation, we show that innovations in global equity volatility can price portfolios formed on carry, while innovations in a commodity-based measure of speculative activity can price portfolios formed on momentum. Finally, we characterize the relation between the factors and the investment opportunity set.

Suggested Citation

  • Gurdip Bakshi & Xiaohui Gao & Alberto G. Rossi, 2019. "Understanding the Sources of Risk Underlying the Cross Section of Commodity Returns," Management Science, INFORMS, vol. 65(2), pages 619-641, February.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:2:p:619-641
    DOI: 10.1287/mnsc.2017.2840
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