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Commodity Futures Risk Premium Over the Long Run

Posted in Commodity Futures

What are long run returns for commodity futures? In their September 2019 paper entitled "The Commodity Futures Risk Premium: 1871-2018", Geetesh Bhardwaj, Rajkumar Janardanan and Geert Rouwenhorst estimate the historical risk premium of commodity futures from a long and broad sample free of survivorship bias covering 230 contract series traded since 1871 mostly in the U.S. and the UK. They calculate the premium as average excess return for rolling front-month contracts in three ways: (1) simple equal weighting of all monthly observations; (2) equal-weighted separately calculated premiums for each contract series; and, (3) average excess return for an equal‐weighted index series. They explore the link between survival of a contract series and its risk premium. They also estimate returns to basis or momentum factor strategies that are each month long (short) the equal-weighted half of available commodities with the higher (lower) futures basis or prior-year spot return. Using monthly prices for 230 commodity futures traded on 28 exchanges during 1871 through 2018, they find that:

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