Commodities as Lotteries: Skewness and the Returns of Commodity Futures

Abstract

This article studies the relationship between the skewness of commodity futures returns and expected returns. A trading strategy that takes long positions in commodity futures with the most negative skew and shorts those with the most positive skew generates significant excess returns that remain after controlling for exposure to well-known risk factors. A tradeable skewness factor prices the cross-section of commodity portfolios and individual commodities as suitably as standard risk factors. This skewness factor partially captures the backwardation versus contango cycle, like the roll yield, momentum and hedging pressure factors, because it conveys information about hedging demand and risk transfer.