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Discussion Paper Details

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Title: Risk Premia and Seasonality in Commodity Futures

Author(s): Constantino Hevia, Ivan Petrella and Martin Sola

Publication Date: March 2016

Keyword(s): Commodity Futures, Nelson and Siegel, Risk premium, Seasonality and Theory of storage

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

Abstract: We develop and estimate a multifactor affine model of commodity futures that allows for stochastic seasonality. We document the existence of stochastic seasonal fluctuations in commodity futures and that properly accounting for the cost-of-carry curve requires at least three factors. We estimate the model using data on heating oil futures and analyze the contribution of the factors to risk premia. Correctly specifying seasonality as stochastic is important to avoid erroneously assigning those fluctuations to other risk factors. We also estimate a nonlinear version of the model that imposes the zero lower bound on interest rates and find similar results.

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Bibliographic Reference

Hevia, C, Petrella, I and Sola, M. 2016. 'Risk Premia and Seasonality in Commodity Futures'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11169