Commodity Futures Characteristics and Asset Pricing Models
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
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Detail(s)
| Original language | English |
|---|---|
| Pages (from-to) | 176-207 |
| Journal / Publication | Journal of Futures Markets |
| Volume | 45 |
| Issue number | 3 |
| Online published | 20 Jan 2025 |
| Publication status | Published - Mar 2025 |
Link(s)
Abstract
A latent-factor model based on the instrumented principal component analysis (IPCA) methodology of Kelly et al. outperforms existing factor models in explaining cross-sectional variations in commodity futures returns. The model allows for observed commodity futures characteristics to work as instruments for unobservable dynamic factor loadings. We find that the relationship between characteristics and commodity futures returns is driven by compensation for exposure to latent risk factors (beta) rather than compensation for exposure to mispricing (alpha). Three latent factors deliver more powerful explanations than any number of observable factors. Among a collection of 20 characteristics, only three are significantly related to latent factor betas. These three characteristics are momentum, expected shortfall, and idiosyncratic volatility. © 2025 Wiley Periodicals LLC.
Research Area(s)
- commodity futures contracts, instrumented principal component analysis, latent factor models, observable risk factors
Citation Format(s)
Commodity Futures Characteristics and Asset Pricing Models. / Qin, Yiyi; Cai, Jun; Zhu, Jie et al.
In: Journal of Futures Markets, Vol. 45, No. 3, 03.2025, p. 176-207.
In: Journal of Futures Markets, Vol. 45, No. 3, 03.2025, p. 176-207.
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
