The geopolitical risk premium in the commodity futures market

Daxuan Cheng; Yin Liao; Zheyao Pan

doi:10.1002/fut.22398

The geopolitical risk premium in the commodity futures market

Daxuan Cheng^*, Yin Liao, Zheyao Pan

^*Corresponding author for this work

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

15 Citations (Scopus)

132 Downloads (Pure)

Abstract

In this study, we investigate the geopolitical risk premium in the commodity futures market. By estimating the exposure of cross-sectional commodity futures excess returns on a historical geopolitical risk index, we find that commodities with low-risk betas generate 9.05% higher annual risk-adjusted returns than those with high-risk betas. The results indicate that low-geopolitical-risk-related commodity futures contracts require extra compensation by risk-averse investors due to hedging demand. We also explore the time-varying characteristics of the geopolitical risk premium: It appears more pronounced during high-geopolitical-risk periods and before the year 2000. Finally, we exploit the subcategories of geopolitical risk and find that geopolitical threats better explain the variation of the geopolitical risk premium than do geopolitical acts, making it a main source of the geopolitical risk premium.

Original language	English
Pages (from-to)	1069-1090
Number of pages	22
Journal	Journal of Futures Markets
Volume	43
Issue number	8
Early online date	18 Jan 2023
DOIs	https://doi.org/10.1002/fut.22398
Publication status	Published - Aug 2023

Bibliographical note

© 2023 The Authors. The Journal of Futures Markets published by Wiley Periodicals LLC. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

commodity futures
cross-section return
geopolitical risk
geopolitical threats
risk premium

Access to Document

10.1002/fut.22398Licence: CC BY-NC-ND

Publisher version (open access)Final published version, 1.89 MBLicence: CC BY-NC-ND

Cite this

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title = "The geopolitical risk premium in the commodity futures market",

abstract = "In this study, we investigate the geopolitical risk premium in the commodity futures market. By estimating the exposure of cross-sectional commodity futures excess returns on a historical geopolitical risk index, we find that commodities with low-risk betas generate 9.05% higher annual risk-adjusted returns than those with high-risk betas. The results indicate that low-geopolitical-risk-related commodity futures contracts require extra compensation by risk-averse investors due to hedging demand. We also explore the time-varying characteristics of the geopolitical risk premium: It appears more pronounced during high-geopolitical-risk periods and before the year 2000. Finally, we exploit the subcategories of geopolitical risk and find that geopolitical threats better explain the variation of the geopolitical risk premium than do geopolitical acts, making it a main source of the geopolitical risk premium.",

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AU - Liao, Yin

AU - Pan, Zheyao

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PY - 2023/8

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N2 - In this study, we investigate the geopolitical risk premium in the commodity futures market. By estimating the exposure of cross-sectional commodity futures excess returns on a historical geopolitical risk index, we find that commodities with low-risk betas generate 9.05% higher annual risk-adjusted returns than those with high-risk betas. The results indicate that low-geopolitical-risk-related commodity futures contracts require extra compensation by risk-averse investors due to hedging demand. We also explore the time-varying characteristics of the geopolitical risk premium: It appears more pronounced during high-geopolitical-risk periods and before the year 2000. Finally, we exploit the subcategories of geopolitical risk and find that geopolitical threats better explain the variation of the geopolitical risk premium than do geopolitical acts, making it a main source of the geopolitical risk premium.

AB - In this study, we investigate the geopolitical risk premium in the commodity futures market. By estimating the exposure of cross-sectional commodity futures excess returns on a historical geopolitical risk index, we find that commodities with low-risk betas generate 9.05% higher annual risk-adjusted returns than those with high-risk betas. The results indicate that low-geopolitical-risk-related commodity futures contracts require extra compensation by risk-averse investors due to hedging demand. We also explore the time-varying characteristics of the geopolitical risk premium: It appears more pronounced during high-geopolitical-risk periods and before the year 2000. Finally, we exploit the subcategories of geopolitical risk and find that geopolitical threats better explain the variation of the geopolitical risk premium than do geopolitical acts, making it a main source of the geopolitical risk premium.

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KW - cross-section return

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JO - Journal of Futures Markets

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The geopolitical risk premium in the commodity futures market

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Fingerprint

BP’s production cuts signal future energy crisis

Why Invest In Commodities?

Hedging tension: the geopolitical risk premium in the commodity futures market

Cite this

The geopolitical risk premium in the commodity futures market

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Fingerprint

Press/Media

BP’s production cuts signal future energy crisis

Why Invest In Commodities?

Research output

Hedging tension: the geopolitical risk premium in the commodity futures market

Cite this