Investment shocks and the commodity basis spread |
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Authors: | Fan Yang |
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Institution: | Faculty of Business and Economics, The University of Hong Kong, Suite 908, K. K. Leung Building, Pokfulam Road, Hong Kong |
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Abstract: | I identify a “slope” factor in the cross section of commodity futures returns: high-basis commodity futures have higher loadings on this factor than low-basis commodity futures. Combined with a level factor (an index of commodity futures), this slope factor explains most of the average excess returns of commodity futures portfolios sorted by basis. More importantly, I find that this factor is significantly correlated with investment shocks, which represent the technological progress in producing new capital. I investigate a competitive dynamic equilibrium model of commodity production to endogenize this correlation. The model reproduces the cross-sectional futures returns and many asset pricing tests. |
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Keywords: | E23 E44 G12 G13 |
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