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Commodities and the Market Price of Risk

Author/Editor: Roache, Shaun K.
Authorized for Distribution: September 1, 2008
Electronic Access: Free Full Text (PDF file size is 500KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton's (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.
 
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Series: Working Paper No. 08/221
Subject(s): Commodity prices | Risk management | Interest rates | Asset prices | Economic models | Investment
Author's keyword(s): Asset pricing | futures pricing
 
English  
    Published:   September 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008221   Pages:   23
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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