Risk premiums and returns in futures markets: evidence from the financial crisis

Darren Henry, Yulia Veld-Merkoulova

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

Abstract

The main purpose of this paper is to analyze the returns to investors trading in commodities futures during the period of the recent financial crisis and stock market decline. Using nonparametric statistical procedures, we find that the speculators could earn a consistent risk premium, which supports normal backwardation theory. We analyze the magnitude of the speculators' realized returns by comparing the performance of 21 semimonthly commodity futures return series and futures indices. These are based on both ”long-only” and ”conditional on hedging position” basis covering the period from January 2007 to July 2009. The speculative position, conditional on hedging demand, earned an annualized return of 11.99%, while the ”long-only” position resulted in a return of -3.45%. Over the same time period, the S&P 500 index declined at an annual rate of 15.43%. Our evidence supports the argument in favour of using commodities futures as part of the overall investment portfolio.
Original languageEnglish
Title of host publicationAdvances in Investment Analysis and Portfolio Management
EditorsCheng F. Lee
Place of PublicationNew York NY USA
PublisherAiriti Press
Pages195-217
Number of pages23
DOIs
Publication statusPublished - 2011
Externally publishedYes

Publication series

NameAdvances in Investment Analysis and Portfolio Management
PublisherAiriti Press
Volume5
ISSN (Print)1941-9864

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