The Decomposition Of Commodity Futures Risk Premia

As China’s economy is experiencing a rapid development and its influence to the world economy is growing, there is no doubt that Chinese commodity futures market will play a decisive role in the future economic development with such functions as adjusting short-term prices, stabilizing long-term prices, attracting leverage operations and so on. Standardized contracts of the underlying commodity are traded in the deposit system among commodity futures market participants. When it comes to the end of an investment, investors will take the net settlement of the spread between spot price and future price as the return, which is what we call a commodity futures risk premium. Commodity futures market, however, has a distinctive characteristic. During the continuous process from the futures contracts initial listed to its final delivery time, the underlying commodity futures price appears to deviate from the spot price first, and then, gradually to its close.This thesis chooses to study on the risk premia of this complex phenomenon from two different dimensions. Through different trading strategies, commodity futures risk premia are decomposed into two premia. The spot premia which are related to the underlying commodity attribute itself, and the term premia which are related to term structure of the holding periods. Next, we use Epstein-Zin Durable consumption Capital Asset Pricing Model(EZ-DCAPM model), which was built up with three explanatory variables as nondurable consumption growth, durable consumption growth and market risk-free interest rate, to make empirical studies of the decomposition of commodity futures risk premia, the results of this thesis showed that:EZ-DCAPM model turns out a pretty good job when it is used to explain the term premia. Among the nondurable consumption growth, durable consumption growth and market risk-free interest rate, these three explanatory variables, the market risk-free interest rates are always effective components of the market portfolio yield, while its power of influence becomes weaker as the term structure grows. Both nondurable consumption growth and durable consumption growth will turn over its direction of impact on the market portfolio returns as term structure adjust and change. As the growth of nondurable consumption and durable consumption exert the same impact direction, the durable consumption growth performs a better explanatory power.Then, commodity futures are sorted according to a number of forecasting variables so that the spot premia and term premia are characterized by the resulting portfolios respectively. It is shown that: the EZ-DCAPM model presents a pleasant explanatory power at the conditional spot premia and the conditional long-term term premia, which is sorted by the accumulation of the last whole year monthly returns and the last whole year monthly price volatility, respectively.