A1001
Title: Commodity inflation risk premium and stock market returns
Authors: Emmanouil Platanakis - University of Bath - School of Management, UK (United Kingdom) [presenting]
Guofu Zhou - Washington University in St. Louis (United States)
Xiaoxia Ye - University of Exeter Business School (United Kingdom)
Ai Jun Hou - Stockholm University (Sweden)
Abstract: A novel measure of commodity inflation risk premium (cIRP) is proposed based on a term structure model of commodity futures. The cIRP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among the existing factors and has substantial new information beyond them. Moreover, various aggregations of the individual cIRP predict stock market returns significantly, even after controlling for major economic predictors including the usual inflation measure. The link between commodities and the stock market is stronger than previously thought.
