Marta Szymanowska

An Anatomy of Commodity Futures Risk Premia

We identify two types of risk premia in commodity futures returns: spot premia related to the risk in the underlying commodity, and term premia related to changes in the basis. Sorting on forecasting variables such as the futures basis, return momentum, volatility, inflation, hedging pressure, and liquidity, results in sizable spot premia in the high-minus-low sorted portfolios between 5% and 14% per annum and term premia between 1% and 3% per annum. We show that a single factor, the high-minus-low portfolio from basis sorts, explains the cross-section of spot premia. Two additional basis factors are needed to explain the term premia.

The Price of Commodity Risk in Stock and Futures Markets

Commodity prices are a risk factor that directly in‡uences in‡ation for consumers as well as input and output prices for …rms. We sort stocks according to their beta with respect to a broad index of commodity futures and …nd that commodity risk is priced. Our cross-sectional regressions imply that a unit exposure to commodity risk is rewarded with a premium of around 5% pre-2004 and -8.5% post-2003. We argue that commodity risk is likely to proxy for in‡ation risk and attribute the reversal to the surge in commodity index investment by institutions in the early 2000s. In a simple model in which investors are exposed to exogenous in‡ation risk, a switch from hedging in the stock market to hedging directly in the commodity market easily leads to the observed reversal in the risk premium. Both time-series and cross-sectional tests imply that the commodity factor is a separate additional risk factor, not replacing the traditional Fama-French-Carhart factors. JEL Classi…cation Codes: G11, G12, G13

Asset Pricing Restrictions on Predictability: Frictions Matter

U.S. stock portfolios sorted on size; momentum; transaction costs; market-to-book, investment-to-assets, and return-on-assets (ROA) ratios; and industry classification show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a predictable risk premium is not equal to compensation for systematic risk as implied by asset pricing theory. We show that introducing market frictions relaxes these asset pricing moments from a strict equality to a range. Empirically, it is not short sales constraints but transaction costs (below 35 basis points) that help to reconcile the observed predictability with linear portfolio return-based factor models, and partly with the durable consumption model. Across the sorts, predictability in industry returns can be reconciled with all models considered with only a 25 basis point transaction cost, whereas for momentum and ROA portfolios, up to 115 basis points are needed. This paper was accepted by Wei Xiong, finance.

The Stock Market Price of Inflation Risk and Its Variation over Time

The inflation risk premium (IRP) in the U.S. stock market varies over time. We use individual stocks to estimate the IRP, because this provides us with a heterogeneous cross-section of exposures. We find that the IRP is a significant -5.5% since the 1960s, but reverses to an insignificant positive value in the recent decade. Consistent with this reversal, we find that the IRP is more negative in recessions historically, but more positive in the two latest recessions. We show that both the introduction of Treasury Inflation Protected Securities (TIPS) in 1997, an attractive alternative inflation hedge, and a reversal in the covariance between inflation and the real economy at the end of the 1990s contribute to this reversal. These findings are consistent with inflation as a state variable in the intertemporal capital asset pricing model (ICAPM).