Manuscrito
No-arbitrage Conditions and the Cross-section of Commodity Futures Returns
Autor
Casassus-Vargas, Jaime Enrique
Higuera, Freddy
Institución
Resumen
Commodity studies have concluded that the traditional Capital Asset Pricing Model (CAPM)
has failed to explain the cross-section of commodity futures returns. However, these studies are based
exclusively on shortest maturity contracts and do not take into account the no-arbitrage restrictions
between futures of di↵erent maturities. Following Bikbov and Chernov (2010), we developed a noarbitrage
model for commodity futures that allows to include observable variables to explain the
future returns. In particular, we test the validity of the CAPM model by specifying a three-factor
model that includes the market portfolio return and two unobservable factors to fit the futures
curve. This model has the particularity that considers a conditional model-based projection of the
latent variables onto the market returns. In contrast to previous studies, our results suggest that the
market portfolio is a key determinant of crude oil, copper, gold and silver futures risk premia. The
fraction of the term premium variance explained by the market returns is significant. Moreover, for
robustness, we include an extra observable macro variable such as inflation, production growth and
exchange rate and study the role of the market portfolio as a determinant of the futures returns. In
all of these specifications, we find that the market portfolio kept its significance from a statistical
and economic point of view.
Keywords: Commodity futures prices, business cycle, asset pricing, time-varying risk premia. 41