Risk Premia in Chinese Commodity Markets

Abstract

This paper investigates risk premia in Chinese commodity markets. We accomplish that by decomposing the returns of commodity futures into spot and term premia following Szymanowska, De Roon, Nijman and Van Den Goorbergh (2014). We find that a three factors model that includes equally-weighted market factor, carry and time-series momentum explains spot premia. The term premium, which represents a deviation from the expectation hypothesis, is weak, in contrast with the significant premium in the US commodity markets associated with the average t-statistic of 4.32 and explained by two investable factors that are derived using calendar spreads. We demonstrate that the term premia are not driven by liquidity and are negatively related to basis likely due to mean-reversion in basis.