Convenience Yield Risk
By Marcel Prokopczuk, Ph.D., Professor of Finance and Commodity Markets, School of Economics and Management, Leibniz University Hannover, Germany and Editorial Board Member, Commodity Insights Digest; Lazaros Symeonidis, Ph.D., Senior Lecturer in Finance, Essex Business School, University of Essex, U.K. and Editorial Board Member, Commodity Insights Digest; Chardin Wese Simen, Ph.D., Professor of Finance, Management School, University of Liverpool, U.K. and Editorial Board Member, Commodity Insights Digest; and Robert Wichmann, Ph.D., Senior Associate, UniCredit Bank AG, Germany
In this paper, the authors develop a framework to quantify the convenience yield risk (CYR) inherent to each commodity futures market. Implementing the paper’s approach, the authors document that their novel CYR measure is informative about future commodity returns. In panel regressions, the CYR predicts future returns with a positive sign. Economically, a strategy that opens long positions in commodity markets with a higher than median CYR signal and sells the remaining commodities yields an average return of 6.93% per year. The performance of the CYR strategy cannot be explained by exposure to existing commodity strategies or other variables that capture changes in the investment opportunity set.
