A Review of the Historical Literature on Commodity Futures Contract Returns

Abstract

Broadly speaking, there are seven strands of literature on commodity pricing theory, which we summarize as follows: The insurance role of commodity futures contracts, which emphasizes the role of the speculator; the theory of storage, which emphasizes the behavior of the inventory holder and commercial hedger; the net-hedging-pressure hypothesis, which encompasses the behavior of both classes of participants; the statistical behavior of commodity futures prices; the attempt to reconcile commodity futures returns with the CAPM; the role of commodities in a strategic asset allocation; and the importance of yields as a long-term driver of commodity returns. Each strand of thought is covered in this paper. The paper concludes that short-horizon effects are due to seasonal hedging pressure and that the price-pressure effects due to seasonal hedging pressure may be slight enough that they can only be detected through trends in futures spreads. The paper also concludes that there appears to be reliable long-horizon effects on outright futures contracts as well.