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Predicting Commodity-Futures Basis Factor Return by Basis Spread

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Predicting Commodity-Futures Basis Factor Return by Basis Spread” by Daehwan Kim offers a thought-provoking exploration of the predictive dynamics within the commodity futures basis factor. Emphasizing its notable positive premium and its role in elucidating commodity-futures excess returns, this study goes beyond existing literature by revealing a predictive relationship between this factor and the inter-quartile spread in the basis.

Drawing on commodity futures market data from 1972 to 2011, the findings underscore the robust predictive power of the basis spread concerning the basis factor return. Notably, these results align with recent theoretical models, shedding light on the impact of economy-wide production shocks on the commodity market risk premium through the basis.

Abstract Of Paper

A growing body of literature confirms the significance of the commodity futures basis factor: It has a significantly positive premium and it explains the cross-section of commodity-futures excess returns. We extend the literature by documenting predictive relation between this factor and the inter-quartile spread in the basis. Using commodity futures market data between 1972 and 2011, we show that the basis spread is a strong predictor of the basis factor return. Our finding supports the insight from recent theoretical models that economy-wide production shock affects the commodity market risk premium through the basis.

Original paper – Download PDF

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Author

Daehwan Kim
Konkuk University

Conclusion

In conclusion, Daehwan Kim’s study on “Predicting Commodity-Futures Basis Factor Return by Basis Spread” enriches our understanding of the predictive dynamics within the commodity futures market. This research highlights the substantial positive premium and explanatory power of the commodity futures basis factor in understanding excess returns.

Significantly, the study goes further to establish a compelling predictive relationship between the basis factor and the inter-quartile spread in the basis, indicating the strong predictive ability of the basis spread with regards to the basis factor return.

These findings align with recent theoretical models, revealing how economy-wide production shocks influence the commodity market risk premium through the basis.

This insight contributes to a deeper comprehension of the intricate interplay between market dynamics and predictive factors in the commodity futures arena.

Related Reading:

Carry Trades and Tail Risk: Evidence from Commodity Markets

Structural Properties of Commodity Futures Term Structures and Their Implications for Basic Trading Strategies

FAQ

Q1: What is the main focus of Daehwan Kim’s paper, “Predicting Commodity-Futures Basis Factor Return by Basis Spread”?

A1: The main focus of the paper is to explore the predictive dynamics within the commodity futures basis factor. It emphasizes the positive premium of the basis factor and its role in explaining commodity-futures excess returns. The study goes beyond existing literature by revealing a predictive relationship between the basis factor and the inter-quartile spread in the basis.

Q2: What does the paper reveal about the predictive power of the basis spread in relation to the basis factor return?

A2: The paper demonstrates that the basis spread has a strong predictive power concerning the basis factor return in the commodity futures market. The findings, based on commodity futures market data from 1972 to 2011, underscore the robustness of the predictive ability of the basis spread and align with recent theoretical models. The research suggests that the basis spread is a key predictor, shedding light on the impact of economy-wide production shocks on the commodity market risk premium through the basis.

Q3: How does Daehwan Kim’s study contribute to our understanding of the commodity futures market and predictive factors?

A3: Daehwan Kim’s study enriches our understanding of the commodity futures market by emphasizing the positive premium and explanatory power of the commodity futures basis factor. The research further contributes by establishing a compelling predictive relationship between the basis factor and the inter-quartile spread in the basis. This insight provides a deeper comprehension of the intricate interplay between market dynamics and predictive factors in the commodity futures arena.

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