DP11169 Risk Premia and Seasonality in Commodity Futures
Author(s): | Constantino Hevia, Ivan Petrella, Martin Sola |
Publication Date: | March 2016 |
Date Revised: | March 2018 |
Keyword(s): | Commodity Futures, Nelson and Siegel, Risk premium, Seasonality, Theory of storage |
JEL(s): | C22, G12, G13 |
Programme Areas: | Financial Economics, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=11169 |
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.