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Fear of Hazards in Commodity Futures Markets

Last Updated on 10 February, 2024 by Rejaul Karim

Adrian Fernandez-Perez of Auckland University of Technology, Ana-Maria Fuertes of Bayes Business School, Marcos González-Fernández of Universidad de León, and Joëlle Miffre of Audencia Business School delve into the intricate dynamics of commodity futures markets in their paper “Fear of Hazards in Commodity Futures Markets.”

The study probes the vital role of active attention to weather, disease, geopolitical, or economic threats, commonly termed as “hazard fear,” as evidenced by the volume of internet searches across 149 query terms. An innovative long-short portfolio strategy, sorting commodity futures contracts based on a hazard fear signal, unveils a significant premium.

Notably, this commodity hazard fear premium stands as a distinct compensation for intrinsic fundamental, tail, volatility, and liquidity risk factors, demonstrating its distinct relevance in the cross-section of commodity portfolios.

The research also reveals heightened exacerbation of the hazard fear premium during periods of adverse sentiment or pessimism in financial markets, shedding light on the intricate interplay of human perception and market dynamics in the commodity futures landscape.

Abstract Of Paper

We examine the commodity futures pricing role of active attention to weather, disease, geopolitical or economic threats or “hazard fear” as proxied by the volume of internet searches by 149 query terms. A long-short portfolio strategy that sorts the cross-section of commodity futures contracts according to a hazard fear signal captures a significant premium. This commodity hazard fear premium reflects compensation for extant fundamental, tail, volatility and liquidity risks factors, but it is not subsumed by them. Exposure to hazard-fear is strongly priced in the cross-section of commodity portfolios. The hazard fear premium exacerbates during periods of adverse sentiment or pessimism in financial markets.

Original paper – Download PDF

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Author

Adrian Fernandez-Perez
Auckland University of Technology

Ana-Maria Fuertes
Bayes Business School, City, University of London

Marcos González-Fernández
Universidad de León

Joëlle Miffre
Audencia Business School

Conclusion

In conclusion, the research by Adrian Fernandez-Perez, Ana-Maria Fuertes, Marcos González-Fernández, and Joëlle Miffre offers valuable insights into the interplay of “hazard fear” and commodity futures pricing.

Their examination of the impact of active attention to various threats, proxied by internet search volume, uncovers a significant commodity hazard fear premium captured through a long-short portfolio strategy.

Notably, this premium constitutes distinct compensation for fundamental, tail, volatility, and liquidity risk factors, emphasizing its independent and pivotal role in the pricing of commodity portfolios.

Moreover, the study highlights the strong pricing of exposure to hazard fear across commodity portfolios, underscoring its influence on market dynamics. Additionally, the exacerbation of the hazard fear premium during periods of adverse sentiment or pessimism in financial markets underscores the intricate relationship between human perception, sentiment, and commodity futures pricing.
This novel exploration contributes to a deeper understanding of the multifaceted determinants shaping commodity markets.

Related Reading:

Does Sophistication of the Weighting Scheme Enhance the Performance of Long-Short Commodity Portfolios?

Understanding the Sources of Risk Underlying the Cross-Section of Commodity Returns

FAQ

What is the main focus of the research paper “Fear of Hazards in Commodity Futures Markets”?

The main focus of the research paper is to examine the role of “hazard fear” in commodity futures pricing. Hazard fear is defined as active attention to weather, disease, geopolitical, or economic threats, and it is proxied by the volume of internet searches across 149 query terms.

What is the key methodology used in the study?

The study employs a long-short portfolio strategy that sorts the cross-section of commodity futures contracts based on a hazard fear signal. This strategy is designed to capture the commodity hazard fear premium.

What is the commodity hazard fear premium, and how is it characterized in the study?

The commodity hazard fear premium is a significant compensation observed in commodity futures pricing. It is distinct from compensation for fundamental, tail, volatility, and liquidity risk factors. The study characterizes this premium as an independent and important factor in the cross-section of commodity portfolios.

You can find many more Research Papers here

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