In Practice
Financial Analysts Journal | A Publication of CFA Institute
the period 2004–2009 and more
subtly in the preceding period.
The reason is consistent with the
author’s assertion that a futures roll
does not precipitate a cash flow;
rather, changes in roll yield reveal
gains or losses across open futures
positions. The ordinary least-
squares regressions on the data
show that roll yield had statistically
significant forecasting power for oil
futures over the period examined
but explained only 0.2% of the
variation in daily futures gains.
What Are the Implications
for Investors and Investment
Professionals?
This study shows that, contrary to common beliefs,
futures investors should not choose their market
positions to capture positive roll yields. Nor should
they eschew positions to avoid losing money from
negative roll yields. Investors should instead focus
on managing portfolio risk and on the returns they
expect to realize through changes over time in the
price of individual futures contracts.
Reassessing the Drivers of Commodity Futures
Returns
This In Practice piece gives a practitioner’s perspective on the article “Commodities for the Long Run,” by Ari
Levine, Yao Hua Ooi, Matthew Richardson, and Caroline Sasseville, published on page 55 of this issue.
What’s the Investment Issue?
There is considerable investor interest in allocating
to commodity futures amid the growing awareness
of commodities as an asset class in their own right.
So, investors need to know how commodities are
expected to perform under different economic
circumstances and, consequently, what value they
bring to a diversified portfolio.
But how well are the drivers of commodity futures
returns known? Plenty of studies have been carried out,
but they have used data from only the last few decades.
The authors reason that if they could go back a lot
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But roll yield is a useful concept in
This study shows that, other ways: It explains when futures
contrary to common gains exceed or fall short of spot price
beliefs, futures investors changes, and it provides information
regarding benefits to the marginal
should not choose their
holder of a spot position in storable
market positions to assets. There is some evidence that
capture positive roll roll yield has a degree of forecast-
yields. Nor should they ing power—and, to a greater extent,
explanatory power—over gains and
eschew positions to
losses in futures markets. This fact
avoid losing money from raises the possibility that roll yield
negative roll yields. could be an economically relevant
state variable for changes in futures
prices over time. In other words, like
market interest rates or equity dividend yields, it could
have a degree of forecasting power for equity returns.
Editor’s Note
Written by Keyur Patel
Accepted by Pamela G. Yang, CFA
The views expressed herein reflect those of the author
and do not represent the official views of the Financial
Analysts Journal, CFA Institute, or the author’s or editor’s
employers.
CE Credits: 0.25
further and analyse data since the 1870s, they could
gain more useful insight. Going back that far includes
many more periods of recession, inflation, and back-
wardation or contango, which have all been previously
identified as key drivers of commodity futures prices.
How Do the Authors Tackle the
Issue?
A significant challenge facing the authors was how to
obtain commodity futures data in a useful format. To
create usable data, they had to manually transcribe
data from 1877 to 1951 from the Annual Report of
Second Quarter 2018