Abstract/Summary

This thesis comprises three essays to contribute to the growing body of research on commodity futures markets. The first essay discusses the dynamics of commodity return comovements. Comparing two distinct factor models concerning their ability to explain the covariance structure of commodity futures returns, we find that a factor model based on tradable portfolio returns can explain most of the realized comovements in commodity returns. We show that the increase in the comovement of commodity returns during the financialization period is driven by intersectoral rather than intrasectoral comovements. Dissecting the evidence, we find that the time variation of the factor covariances rather than the variation of factor exposures is the driving force behind this increase. The dynamics of return comovements are not mirrored by volatility comovements, which jump following the global financial crisis. Our results cast doubt on the long-term effects of commodity market integration and have practical relevance for risk management. In the second essay, we study the effect of inventory news on the natural gas market. We find that more than 50% of the annual return is generated on announcement days of the EIA storage report. Surprisingly, the announcement effect cannot be explained by the announcement surprise, supply and demand, spillover effects, or other return predictors. Investigating the intraday pattern, we find that the return splits half into a pre- and post-announcement part, with the pre-announcement return entirely accumulating on days when storage levels exceed analysts’ expectations. These results are difficult to reconcile with explanations based on informed trading. After transaction and funding costs, a simple trading strategy yields substantial returns. The third essay proposes a measure for convenience yield risk that can predict commodity futures returns. The measure incorporates the seasonal patterns in convenience yield as well as the term structure and time variation of its volatility. Portfolios sorted by convenience yield risk provide a significant excess return over common commodity factors. The predictive power of convenience yield risk in the cross-section is not subsumed by commodity or time fixed effects. Dissecting our measure, we find it to be driven by the term structure variation of convenience yields and closely related to the Samuelson effect and the basis. On average, commodities with high convenience yields experience high convenience yield risk and vice versa. This dynamic breaks down at higher frequencies.