SSRN Id4730746

The Flipside of Financial Innovation: Why Contracts Fail*
Rajkumar Janardanan
SummerHaven Investment Management
Xiao Qiao
City University of Hong Kong
K. Geert Rouwenhorst
Yale School of Management
January 2024
Abstract
We examine factors that predict the success and failure of financial innovations using a novel
comprehensive database, which contains surviving and defunct commodity futures contracts traded on
28 exchanges between 1871 and 2022. New innovations are more likely to fail if they do not sufficiently
compensate investors for risk, or if they experience extreme returns. Contracts are also less likely to
succeed if they face significant competitive pressure from other products or exchanges. Sometimes,
innovations fail because they experience systemic shocks such as wars, economic recessions and financial
crises.
* Sections of this paper were previously circulated as “The Commodity Futures Risk Premium: 1871-2018”. We have
benefited from comments and suggestions from Nick Barberis, Hank Bessembinder, Jon Ingersoll, Ed Kaplan, Ben
Matthies, Kurt Nelson, Paul Goldsmith-Pinkham, Kevin Sheehan, Alp Simsek, participants at the 3rd JPMCC Annual
Commodities Symposium at the University of Colorado, Denver, the 2020 WFA Annual Meetings, 2021 Asia-Pacific
Association of Derivatives Conference, FTSE World Investment Forum, 2023 Derivative Conference Auckland, and
seminars at the Commodity Futures Trading Commission, City University of Hong Kong, Purdue University, and the
University of Texas A&M. We thank Liyu Cui, Zining Dong, Yuan Gao, Yimin Gong, Jie-Lu Lee, Nan Liao, Ziwei Luo,
Ruilu Ma, Arpita Mukherjee, Usharani Nidadavolu, John Petrini, Yingzhi Xiao, Chunqi Xu, Zi Ye, and Guangyu Zhang
for their help in collecting the data. Rouwenhorst acknowledges financial support from the Yale School of
Management. Qiao acknowledges financial support from the Research Grants Council of the Hong Kong SAR, China
(No. CityU 21500422 and CityU 11500823). SummerHaven Investment Management invests, among other things, in
commodity futures. The views expressed in this paper are those of the authors and not necessarily those of
SummerHaven Investment Management.
Electronic copy available at: https://ssrn.com/abstract=4730746

1. Introduction.
Financial innovation is a significant driver of economic development and growth (see reviews by
Levine (1997), Tufano (2003), and Lerner and Tufano (2011)). Much of the literature focuses on
conditions that are conducive to financial innovation and discusses the welfare impact of
successful innovations (e.g., Van Horne (1985), Miller (1986)), while comparatively little work
exists on factors that determine the success or failure of attempts to innovate. For every
successful financial innovation, there are likely just as many, if not more, unsuccessful attempts
that fail to gain traction. Our paper attempts to understand why this is the case and what
differentiates between success and failure by empirically modeling the process of survival
following the introduction of a new financial product.
A survey of the financial innovation literature by Frame and White (2004) turns up very few
empirical studies that “specifically test hypotheses or otherwise provide a quantitative analysis
of financial innovation.”1, 2 Key reasons for the shortage of empirical studies are the difficulty and
cost of collecting data relevant for securities innovation research, and a lack of consensus on
what constitutes an innovation. Authors tend to adopt different classifications that are not
necessarily mutually exclusive: product versus process (Tufano (2003), or incremental versus
drastic (Tirole (1988)). Perhaps the clearest delineation comes from Merton (1995) who posits
six vital functions delivered by financial systems, for which financial innovation seeks to provide
better solutions (Tufano 2003). In this context, Merton (1992) focuses on derivatives as an area
of major innovation that expands risk sharing opportunities for both households and firms.
We study financial innovation through the evolution of commodity futures markets, an important
subset of derivatives with a long history spanning successful and failed attempts to innovate.
1
A sizable descriptive literature exists for financial innovation, enumerating and categorizing important innovations
(e,g, Tufano (1989), Finnerty (1992), Goetzmann and Rouwenhorst (2005)).
2
A shortage of quantitative data may have contributed to a dearth of studies. As Frame and White (2004) point out,
commonly used datasets in financial economics such as CRSP or COMPUSTAT do not contain useful data for the
study of financial innovations. Quality data on financial innovations are difficult to obtain and often require direct
data collection efforts by researchers.

New contracts are product innovations intended to provide producers and users new
opportunities to manage commodity price risk at various locations around the world, thereby
facilitating input and output decisions. This empirical setting offers three important advantages.
First, the common setting and relative uniformity of a single product class allow us to
quantitatively test a set of specific hypotheses suggested in the literature, which would be
prohibitively difficult if the scope of comparison were too broad. Second, while commodity
futures constitute a single asset class, there exists considerable heterogeneity across contracts
in terms of underlying physicals, delivery locations, and trading clienteles. Such heterogeneity
lends power to our statistical analysis to uncover common factors that retain external validity.
Third, futures trading in the US goes back more than 150 years. By examining innovation over the
full history of futures markets, we are able to draw general conclusions about what factors drive
the success of financial innovations.
Lacking clear guidance from the financial innovations literature for identifying factors associated
with survival, we combine ideas from the literature on commodity futures and financial
intermediation to formulate our hypotheses: (i) the importance of a fair compensation for risk,
(ii) concerns about contract fairness and limited capacity to absorb losses, (iii) competition among
contracts and exchanges, and (iv) the importance of shocks to the intermediary system. This list
of candidate factors is not exhaustive and is in part driven by data availability over the full 150
years of market history. Yet we find that it provides valuable insights into what variables may
influence the success and eventual impact of new financial innovations that likely extend beyond
the context of futures markets.
Price setting that embeds a fair compensation for risk is the cornerstone of modern asset pricing
models. Keynes ((1923), (1930)) considers a risk premium to be a prerequisite for the successful
transfer of risk in futures markets. Sustained large losses to one side of a contract can raise
concerns about the fairness of contract terms, as well as lead to the losing side to eventually
withdraw from the market (Gray (1966)). Market participants are particularly sensitive to

extreme returns when contracts are young and traders are relatively unfamiliar with contract
specifications, causing newly introduced contracts to be especially susceptible to failure.
Hieronymus (1971) and Silber (1981) argue that competition among exchanges and among
contracts creates a contest for survival when innovations are launched to either compete with or
to improve upon existing contracts. Tufano (1989) makes a similar point about competition in the
context of securities markets. Finally, a more recent literature emphasizes the important role of
financial intermediaries (e.g., He and Krishnamurthy (2012)). Intermediaries facilitate
transactions and keep records, and a reduction in the willingness and ability of financial
intermediaries to participate can lead to contract failure. This effect can become especially
prominent during recessions and financial crises.
To test our hypotheses, we employ a novel and unique database of futures prices that was hand
collected from exchange handbooks and newspapers going back to the inception of futures
trading in the United States. This database provides broad market coverage for a wide range of
physical commodities across different sectors and delivery locations, and is by far the most
comprehensive in the futures literature. A distinctive aspect of this data is the extensive coverage
of delisted contracts. Out of the 230 contracts in our dataset, only 48 survive until the present
and 182 have ceased trading before the end of our sample period. The prevalence of
discontinued contracts allows us to conduct our exploration of the conditions for contract
survival.
Our main findings are as follows. We first establish that commodity futures prices on average
embed a positive risk premium that accrues to the long side of the market. The arithmetic
average risk premium across contracts and time is 5.82% annualized. Measured as an equal-
weighted index, the premium is 5.60% per annum between 1870 and 2022. The median individual
contract earns a lifetime average premium of 1.67%. The existence and the direction of this
premium was presumed by Keynes (1923) to incentivize speculative capital to absorb the excess
(short) hedging demand that exists in many commodity futures markets.

Next, we link the presence of a risk premium to the likelihood of contract survival. The reverse of
the Keynesian requirement of a premium, is that the absence of a premium would discourage
speculative participation and jeopardize market development. Our empirical analysis finds
support for this idea. Kaplan-Meier survival estimates show that the contract failure hazard is
highest during the first two years following new contract listing and gradually falls with age.
Consistent with the Keynesian view, these short-lived contracts on average earn a negative risk
premium, while contracts that survive for an extended period earn on average a positive
premium. Among the contracts that survive longer than 50 years, 94% earn a positive lifetime
risk premium. We estimate Cox proportional hazard models to establish a statistically reliably
negative relationship between the risk premium and the failure rate of contracts.
While low average premiums disincentivize long speculators to absorb excess hedging demands,
unusually large price increases can be detrimental to short speculators. Especially for a young
contract, large losses to either side of the market can raise questions about the fairness of the
contract. We find that contracts that experience extreme returns early in their lives are more
likely to fail. This finding is consistent with Gray’s (1966) conjecture that persistent losses increase
the likelihood of contract failure as risk averse traders become more likely to withdraw from the
market.
Competition among contracts can take two forms: product innovation on the same exchange and
product competition among exchanges. The latter is outright competition, while the former aims
to adapt existing contracts to customer demand, thereby discouraging competition from outside
exchanges. We find that cross-exchange competition predominantly favors the incumbent, in line
with Silber's (1981) and Tufano's (1989) findings. Innovation on the same exchange increases the
hazard for both old and new contracts, demonstrating that improving an existing contract is not
a straightforward process.
The main contributions of our paper are to the literature on financial innovation and the
literature on commodity futures markets. Our paper is one of the very few in the innovation

literature to formally test hypotheses about the success and failure of financial innovations and
quantify the impact of different channels.3 By exploring factors such as the presence of a risk
premium, concerns about instrument fairness, market participants' ability to absorb sustained
losses, and competition among available products, we investigate a broader set of factors
compared to the literature and expand our understanding of financial market development.
These factors are likely not limited to commodity markets alone and are expected to play a role
in shaping financial markets more broadly.4 Furthermore, by studying the stage of the innovation
process that follows the initial launch, our paper complements the literature which tend to focus
on factors that are conducive to the introduction of novel instruments (e.g., Miller (1986)).
A subset of the financial innovation literature focuses on the evolution of futures markets. Silber
(1981) investigates innovation and competition in Gold, Silver, and GNMA futures markets from
1960 to 1980. Black (1985) studies the effect of several factors on trading volume, a proxy for
contract success, for financial futures from 1975 to 1985. Our paper is closest to Carlton (1984)
who computes the conditional probabilities of failure for future contracts using data from 1921
through 1983, but does not test for factors that influence said probabilities.
We contribute to the literature on commodity futures markets by providing comprehensive
evidence on the long-standing debate on whether futures markets, on average, set prices to
embed a risk premium.5 We provide long-term estimates of the commodity risk premium by
3
Commenting on the state of the financial innovation literature, Frame and White (2004) quip “everybody talks
about financial innovation, but (almost) nobody empirically tests hypotheses about it.”
4
For example, anecdotal evidence suggest that 18th century mortgage securitizations and mutual funds in The
Netherlands disappeared or failed to grow following periods of sustained investor losses (Goetzmann and
Rouwenhorst (2005)). The ability of participants to absorb sustained losses and competition among available
products potentially led to the failure of a number of cryptocurrencies from 2017 through 2021.
5
Early attempts to accurately estimate premiums for individual contracts were often inconclusive, hampered by the
sampling variation induced by the high volatility of commodity prices over short time periods (see Houthakker
(1957), Telser (1958), Cootner (1960), and Gray (1960, 1961)). More recent studies have examined excess returns
on portfolios of futures contracts over periods that span multiple decades, in the same way that the equity risk
premium literature has focused on portfolios of stocks instead of individual securities (Bodie and Rosansky (1980),
Kolb (1992), Erb and Harvey (2006), Gorton and Rouwenhorst (2006), and Levine, Ooi, Richardson, and Sasseville
(2018)).

tracing the economically most important futures contracts over the full history of futures trading
in the United States. Moreover, our extensive coverage of both successful and defunct contracts
allows us to quantitatively assess the influence of survivorship on estimates of the commodity
futures risk premium.6
Finally, we contribute to a small but growing literature on the cross-sectional distribution of
individual asset risk premiums (Bessembinder (2018), Bessembinder et.al. (2019)). We contrast
the distribution of commodity futures risk premiums to the distribution of risk premiums on
individual stocks.
The remainder of the paper is structured as follows. Section 2 contains a detailed description of
our data. Section 3 provides estimates of the historical commodity risk premium and explores
the influence of survival on estimates of the premium. In Section 4, we test hypotheses about
the factors that affect the failure probability of contracts. Section 5 compares the distribution of
multi-period returns of commodity futures and equities. Section 6 concludes.
2. Background and overview of data

Commodity futures, as a whole, constitute a type of “drastic” financial innovation under the
classification of Tirole (1988). Viewed as a sequence of innovations, individual commodity futures
contracts lie on a spectrum of varying degrees of incremental innovation. The introduction of a
futures contract with an existing substitute (e.g., Sugar No. 2) represents a more incremental
innovation, whereas the beginning of a completely new contract with no prior substitutes (e.g.,
Heating Oil) may be considered a more drastic innovation.
Contracts that call for the future delivery of commodities date back to Babylonian times and the
centralized trading of commodities predates the development of many securities markets in
Europe. The founding of the Dojima Rice market in 1752 in Japan marks the first regulated
6
Existing literature (e.g., Brown, Goetzmann and Ross (1995)) has shown that conditioning on survival can lead to
biased inference in the empirical measurement of long-term average returns.

commodity futures exchange (Schaede (1989)), roughly a century before futures trading in the
US commenced in Chicago in 1865.7 Despite the long history of commodity futures trading, few
comprehensive databases of historical price records exist. Among the most widely used
resources is a database maintained by the Commodity Research Bureau which reports individual
futures price data going back to 1959, 88 years shorter than our database. Existing studies on
financial innovation have employed relatively smaller datasets than ours along both the time
series and cross-sectional dimensions. Carlton (1984) examines 79 futures markets from 1921 to
1983. Tufano (1989) studies 58 financial innovations from 1974 to 1986. In comparison, our data
cover 230 innovations spanning 150 years.
2.1 Data sources and definitions, and the evolution of contract introductions
There are several hurdles in assembling a comprehensive database of commodity futures prices.
Exchanges did not always create a published record of prices8 and in other instances the primary
archival records were lost.9 Instead, the bulk of the data used in this paper is collected from
newspapers. Unlike exchange handbooks or archives, newspapers represent a secondary source
of data which potentially creates a selection bias. Early newspapers had a regional audience, and
US and UK papers were naturally more likely to report prices of commodities that were traded
or delivered in their own hemispheres and ignore those that settled in other parts of the world.
In addition, a likely requirement for a contract to be included in a newspaper is that the market
has gained enough economic importance to merit coverage. Contracts that failed to attract
sufficient trading volume are likely to be underreported. For these reasons, our database does
7
Trading for future delivery in New York City and Buffalo preceded the adoption of formal trading rules for futures
in Chicago by more than two decades (Williams (1982)).
8
The CBOT has published yearbooks with futures prices from 1877 until 1968. The Chicago Mercantile Exchange has
published futures prices since 1925, first in the Dairy and Produce Yearbook from 1925-1951 and subsequently in
the CME yearbooks from 1952 to 1977. The Minneapolis Chamber of Commerce published Annual Reports since at
least 1876, and includes futures data beginning in 1895.
9
The records of the New York Board of Trade were lost as a result of the events of 9/11/2001.

not include all contracts ever traded, nor does it necessarily provide a complete time-series
record of lifetime returns for the commodities that are included.10 Moreover, when analyzing the
factors that influence contract survival, we may incorrectly measure the timing of discontinuation
from the exchange when using disappearance from the newspaper as our proxy for failure. 11
Despite these caveats, we believe that our database covers the substantial majority of the
economically important commodity futures over the past 150 years.12
The database combines price records from exchange handbooks, when available, with price data
hand-collected from newspapers in the US and Europe. By combining multiple sources, we are
able to collect prices for 230 commodity futures contracts listed on 28 exchanges going back to
1871. It is to our knowledge the most comprehensive database employed by researchers.
The primary sources of futures price data are the yearbooks published by the Chicago Board of
Trade (CBOT), the Chicago Mercantile Exchange (CME), and the Annual Report of the Chamber of
Commerce of Minneapolis (CCM). Newspaper data were collected from The New York Times, the
Wall Street Journal and the Chicago Tribune in the United States and The Guardian in the United
Kingdom. The exchange yearbooks account for 37 contracts, and the newspapers for 184
contracts.13 For price data obtained from newspapers, we used two independent sources to
verify the accuracy of prices when possible. Figure 1 depicts the timeline for all contracts in the
database chronologically ordered by their date of entry. Appendix Figure A1 groups the contract
timelines by sector.
10
For the period 1960-1970, Sandor (1973) provides a list of 56 contract introductions on 10 US exchanges. This is
roughly double of the number of contracts added to our database over that same period.
11
On the other hand, it is possible that exchanges keep a track record of “zombie” contracts after they have
effectively failed to attract open interest in which case disappearance from the newspaper might give a better
indication of the timing of failure.
12
Carlton (1984) points out that the advantage of newspapers as a data source is that they automatically screen
inactive or very low volume markets. The disadvantage is that there may be changes in reporting standards over
time or simple lapses in reporting.
13
Recent data on nine contracts were obtained from CRB as these were unavailable from primary sources such as
European rapeseed and Chicago Platts Ethanol.

Panel A of Figure 1 provides an overview of the data coverage in the early days of futures trading
pre-1900. The figure can be thought of as a pictorial representation of the evolution of
commodity futures markets. Most contracts that were introduced eventually disappeared and
relatively few have survived until today. Of the contracts that initiated coverage pre-1900, only
eight have survived to the present: Chicago Wheat, Corn and Oats, New York Cotton, London
Copper and Tin, and the Wheat contracts in Minneapolis and Kansas City. The timelines further
illustrate how the early expansion of futures markets was concentrated in the agricultural sector,
and more narrowly in contracts of Grains and Oilseeds. An important aspect of this evolution is
that many early contract introductions were designed to expand the delivery and trading
locations of existing commodities (ignoring differences in grades), while relatively few expanded
the range of the underlying physicals. For example. following Chicago (1870),14 Corn contracts
were introduced in Toledo (1874), Baltimore (1877), St Louis (1879), Philadelphia (1880), New
York (1881), Boston (1883), Buffalo (1884), Kansas City (1900), Milwaukee (1902), and
Minneapolis (1937). These same cities also initiated futures trading in Wheat, as did several
others: Cincinnati, Detroit, Duluth, and San Francisco. As a result of this expansion, the database
covers 12 different Corn contracts and 27 different types of Wheat. The majority of new contract
introductions pre-1900s are linked to Wheat, Corn, Oats, and Barley. Rye (Chicago), Cloverseed
(Toledo, Chicago), Flaxseed (Chicago and Duluth), and Timothy seed (Chicago) round out the set
of early agricultural commodity contracts.
The expansion of futures trading on new physical commodities was relatively infrequent pre-
1900. Most notable instances include the introduction of futures contracts on animal products in
Chicago (1870-74) and New York (1900), and the inception of Metals trading in London for Copper
(1875), Tin (1875), and Pig Iron (1901). The earliest Softs contracts include Cotton in New York
(1873), Liverpool (1879), New Orleans (1881), and Alexandria (1893), and Coffee in New York
(1882) and Le Havre (1900). Despite the concentration in the agriculture sector, by 1900 our
14
The contract introduction dates in parentheses refer to the first year of entry in our database.

futures database encompasses four of the six major commodity sectors recognized today
including Grains and Oilseeds, Softs, Industrial Metals, and Livestock. Precious Metals enter the
database in 1909 (London Silver). Futures on Energy are the last to emerge: Crude Oil and
Gasoline contracts appear to have briefly traded in New York in 1935 but failed shortly after their
introduction. Since then, no mention of Energy contracts can be found until the introduction of
Heating Oil in 1978, followed by Crude Oil (WTI, 1983) and Gasoline (1984).
Figures 1B through 1E show the remainder of the evolution of the data. Of the contracts that
were introduced in the first 30 years of the 20th century, only New York Cocoa and New York
Copper still exist. Of those initiated between 1930 and 1960, only the Chicago Soybean complex
and New York Platinum have survived until today. The majority of the currently traded contracts
were introduced after 1960.
Figure 1 not only illustrates the ebb and flow of contracts, but also the evolution of settlement
locations of commodities trading. The role of Chicago as the center of early commodities trading
is well documented (Taylor (1917)). However, by the middle of the 20th century, New York had
all but overtaken Chicago in terms of the number of unique commodity listings, and many of the
trading locations that emerged during the early expansion of commodity futures trading have
since disappeared as improvements in transportation led to the closing or consolidation of
futures exchanges over time.
Innovation in commodity futures contracts is not merely an artifact of distant history, but
continues to be an important aspect of market development today. Even in the most recent
period since 1990, we observe several newly introduced contracts that, for one reason or
another, stopped trading. ICE Robusta Coffee traded from 1991 to 2008. Kansas City Western
Natural Gas traded from 1996 to 1998. Chicago Butter AA traded from 1996 to 2010. Contract
introductions and failures are a sign of dynamic and evolving markets.
To provide a sense of the depth of our database at any given point in the sample, we plot the
total number of distinct commodities in Figure 2 using three different levels of aggregation.
10

Under the first method (level 1), each contract is counted separately. For example, we distinguish
between Hen Turkey and Tom Turkey contracts that were both introduced on the CME in 1962.
When we aggregate across commodities by location (level 2), the two Turkey contracts are
counted as one, referencing the same underlying physical: Chicago Turkey. Our final measure
counts the number of unique underlying physical commodities across all locations (level 3);
Chicago Corn, Duluth Corn, and Toledo Corn and are counted only once as a single underlying
(Corn).
Figure 2 shows that, except for the first 10 years, the number of distinct contracts in the database
averages between 25 and 55 (levels 1 and 2) up to World War II. The number of unique underlying
commodities (level 3) varies between 10 and 35 for most of the sample. Existing papers that
collect earlier data samples include Bodie and Rosansky (1980) and Levine, Ooi, Richardson, and
Sasseville (2018). The latter study the longest time series of futures prices in the literature thus
far, obtained by digitizing the Chicago Board of Trade yearbooks back to 1877. In their case,
Levine et al. (2018) cover six contracts (mostly grains and oilseeds) between 1877 and 1960.15
2.2 Excess return calculation

For the purpose of measuring the risk premium, we use end-of-month data to calculate excess
returns on the nearest-to-maturity contract that does not mature during that month.16 Denoting
𝐹𝑡𝑇 as the futures price at time t for a contract that matures at time T, we define the futures
return as:
𝑇 −𝐹𝑇
𝑇 𝐹𝑡+1 𝑡
𝑅𝑡,𝑡+1 = [1]
𝐹𝑡𝑇
15
This commodity set is considerably smaller than ours, especially pre-1960. Prior to 1960, our data include not only
animal products and grains and oilseeds, but also softs, precious metals, and industrial metals. Appendix Figure A3
compares the commodity count of our sample to Levine et al. (2018).
16
Risk premiums can vary across the curve (Szymanowska et al. (2014)), but long-term data on the term structure is
sparse.
11

Because the futures return defined in [1] is an excess return, its expected value has the
interpretation of a risk premium. Averages of realized excess returns are then used as estimates
of realized risk premiums.
3. Empirical estimates of commodity futures risk premiums

Before proceeding to the development of our hypotheses about the survival and failure of
contracts in Section 4, we present risk premium estimates in futures prices. Risk premiums play
an important role in our survival analysis, and its role had been conjectured by Keynes (1923) a
century years ago. However, the presence of premiums in commodity futures prices has
remained a controversial issue since the early academic literature.17 Our estimates are based on
averages of [1] across commodities and time. The simplest estimate assigns equal weights to all
observations in the database. We compare this value to the cross-sectional average of risk
premiums on individual contracts, and the average excess return on an equally-weighted index.
The latter effectively averages returns cross-sectionally by month, before calculating a time series
average. The three estimates of the risk premium are summarized in Panel A of Table 1.
3.1 Average commodity futures risk premium

Our first estimate of the risk premium takes a simple average across all 69,444 monthly return
observations in the database. Treating each monthly excess return as a separate, independent
observation (“by observation”) of the risk premium results in an average (annualized) excess
return of 5.82%, with an annualized volatility of 29.1%. Moreover, 52% of the excess return
observations in the database are positive. These findings form the basis for our conclusion that
on average across commodities, locations, and time, current futures prices have been set at a
discount relative to future (spot) prices.
17
See for example Houthakker (1957), Telser (1958), Cootner (1960), Gray (1960, 1961), and Gray and Rutledge
(1971) for a comprehensive survey of the early empirical work on the risk premium.
12

Our second estimate (‘by contract”) starts by calculating the time-series average premium for
each of the 230 individual commodity contracts. The cross-sectional average of these time-series
means is 2.72% annualized (t-stat = 1.76), lower than our first estimate. In Section 4.2, we show
that the difference is explained by low average premiums for short-lived contracts, which results
in relative overweighting of these contracts in the cross-sectional mean.18
The majority (59%) of the contracts earns a positive lifetime risk premium. To put this number in
perspective, Bessembinder (2018) finds that only 43% of stocks earn a positive lifetime risk
premium, which suggests that risk premiums in equity markets are earned by a minority of
companies. Our result stands in contrast to Bessembinder’s and indicates that risk premiums in
commodity markets are distributed more uniformly. We provide a detailed comparison of equity
and commodity multi-period returns in Section 5.
Using returns to rolling futures as a measure of the “buy-and-hold” returns, we find that the
median contract earns a geometric average premium of 1.67% annualized over its lifetime. A full
list of the individual commodity risk premiums is given in Appendix Table A1.
Finally, following Bodie and Rosansky (1980) and Gorton and Rouwenhorst (2006), we report the
average excess return for a monthly rebalanced equally-weighted commodity futures index,
constructed after aggregating commodities by location (level 2).19 The arithmetic (geometric)
average premium of the index is 5.60% (4.67%) per annum. Given the length of the time series,
the estimate of the average premium shows high statistical significance (t-stat = 4.79).20
Panel B of Table 1 presents the average risk premium by sector, calculated by observation, by
contract, and as an equally-weighted index. The average premium has been remarkably uniform
18
In comparison, Levine, Ooi, Richardson, and Sasseville (2018) document a cross-sectional average premium of
4.5%. Their data include few failed contracts. As such, their cross-sectional mean is less influenced by short-lived
failed contracts.
19
The premium on an equally-weighted index has been used as a measure of the “investment return” in several
recent studies of the risk premium, such as Bhardwaj, Gorton, and Rouwenhorst (2016), and Levine, Ooi, Richardson,
and Sasseville (2018).
20
It is also economically significant as it is closer to the historical average return of stocks than that of bonds over
this time period.
13

across sectors, and positive in every sector. Except for Energy, for which the return history is
much shorter and the number of contracts much smaller than for the other sectors, the
annualized average sector premiums fall within a relatively narrow range of 2.2% per annum
when measured by observation, and 2% when comparing average sector index excess returns.
The range is somewhat wider when measured by contract. Most of the sectors exhibit lower
averages measured by contract than by observation or index. Across the three sets of risk
premium estimates, in most cases, the fraction of non-negative values exceeds 50%.
To summarize, our three estimates of the commodity risk premium provide strong evidence in
support of the presence of a positive risk premium in commodity futures markets. In Section 4,
we provide support for the notion that the expectation of a positive risk premium is critical for a
well-functioning market, and we show that absent a risk premium, contracts are at an increased
risk of failure.
3.2 Survivorship bias

Most contracts in our database cease to exist by the end of the sample. Do risk premiums differ
between defunct and surviving contracts? Stated differently, do estimates of the commodity risk
premium differ when defunct contracts are excluded from the sample and only surviving
contracts are included in the calculation?
Accounting for biases induced by survival is a central theme in many areas of finance. For
example, Brown et al. (1992), Elton, Gruber, and Blake (1996) and Carhart et al. (2002)
demonstrate the importance of accounting for survivorship in evaluating the performance of
fund managers. Poor performance negatively impacts the probability that a fund survives, hence
the returns earned in a sample of surviving managers overstate the average return that investors
can expect to earn. Brown et al. (1995) and Jorion and Goetzmann (1999) apply a similar logic to
the average risk premiums of national stock markets, showing that survival can impart an upward
14

bias in realized country index returns.21 They argue that few stock markets have survived for as
long as the US market and the average return earned by investors in the US likely overstates
estimates of expected returns in equity markets around the world.
In Panel A of Table 2, we compare the average premium for surviving and non-surviving contracts
using different weighting schemes. When we weigh by observation or by index, the difference
between the risk premium estimates is small. If we weigh all contract-month observations
equally, the estimate is 5.66% per annum for surviving versus 5.96% for non-surviving contracts.
The difference between an equally-weighted index consisting of all contracts versus an index of
contracts that survive until the end of the sample is 27 basis points per annum, but this time in
favor of surviving contracts. In contrast, if we compare the individual contract time-series means,
we find that the spread between the premiums becomes noticeably larger: 6.26% for the
surviving contracts versus 1.79% for the non-surviving contracts, which indicates that the lower
average risk premium by contract (2.72%) reported in Table 1 (Panel A) can be attributed to the
low average premium on non-surviving contracts. This seeming discrepancy between the
relatively small differences at the observation and index levels and the large difference at the
contract level suggests a nuanced conclusion for survivorship bias. Measured one way,
survivorship bias appears large. Measured another way, survivorship appears negligible.
In the next section, we resolve this discrepancy through a formal analysis of the relationship
between risk premiums and survival times.
4. Survival of contracts
4.1 Hypotheses
21
Although survival is often associated with an upward bias in returns and failure with poor performance, Brown
et al. (1995) also discuss the possibility of the failure of a market following high average returns, as might happen
in the case of a revolution.
15

The literature on the history and development of futures markets suggests that many factors can
potentially play a role in the success and failure of futures contracts.22 In discussing the
requirements for success, Gray (1966) emphasizes the importance of an active spot market, well-
designed contract terms that do not provide an advantage to either hedgers or speculators, and
the presence of hedging demand for the underlying commodity. Speculative capital is particularly
important when the hedging demand for futures is not evenly balanced across both sides of the
contract, and there is excess hedging demand on one side of the market.
Gray (1966) hypothesizes two channels by which returns can affect the likelihood of survival of a
commodity futures contract. The first channel focuses on the directional sign of the risk premium
and the importance of speculative market participation. Speculators are needed to absorb the
typical imbalance that arises when short hedging exceeds long hedging by producers and users
of the physical commodity. In order to attract speculator participation, the futures price must be
set at a discount relative to expected future spot price (Keynes (1930)). In the absence of a risk
premium, an otherwise well-structured contract is nevertheless more likely to fail.
The second channel presumes that futures traders are averse to suffering persistent losses. When
sustained high returns are earned by one side of a futures contract, the market is unlikely to
survive because the losses incurred by the other side will cause those traders to eventually
withdraw from the market. Indeed, persistently large return realizations to either the long or
short side of the contract will increase the likelihood of failure. This hypothesis links the likelihood
of survival to the absolute magnitude, but not the directional sign of realized returns.
We extend Gray’s line of reasoning and hypothesize a differential impact of positive and negative
extreme returns. Hedgers and speculators may respond differently to large losses because
hedgers tend to be net short (Gorton, Hayashi, and Rouwenhorst, 2013) and therefore more
sensitive to extreme positive returns, whereas long speculators providing price insurance are
22
See for example Gray (1966), Hieronymus (1971), Silber (1981), Carlton (1984), Black (1985), Brorsen and
Fonfana (2001), and Till (2014).
16

more sensitive to extreme negative returns. Although all futures traders are averse to losses, the
net exposure of speculators exceeds that of hedgers by the nature of hedging: Futures losses by
hedgers are partially offset by a gain in the value of the underlying asset, limiting their net
exposure to the futures basis. Therefore, the sensitivity of hedgers and speculators to extreme
returns is expected to be different. The above considerations are likely more salient in the early
years following the introduction of a new futures contract when there is less familiarity with the
contract and concerns may exist about whether the contract is well designed and offers fair terms
to all market participants.
As emphasized by Hieronymus (1971), the co-existence of substitute contracts is likely a factor
for predicting survival, as liquidity tends to migrate to contracts that best meet the trading
requirements of hedgers and speculators alike. New contracts may be introduced by an exchange
in response to the need to adapt to developments in the underlying physical markets or as an
attempt to steal business from successful contracts listed on competing exchanges. We
distinguish between the introduction of a substitute contract on the same exchange, versus new
listings that offer an alternative to contracts listed on exchanges elsewhere. The former is more
likely an attempt to forestall potential competition by adapting to changes in the underlying
physical markets (e.g., New York Raw Sugar No. 1 and New York Raw Sugar No. 2): The
expectation is that the new contract will eventually replace the existing contract on that
exchange. In contrast, the introduction of contracts that substitute for existing contracts traded
elsewhere serves to increase competition (e.g., Toledo Wheat and St. Louis Wheat). Because it is
hard to compete with incumbent contracts, the survival dynamic would be reversed. In this case,
the new entrant is expected to have a higher failure rate, and the incumbent contract more likely
to survive.
Our final set of factors is macroeconomic in nature and focuses on the business cycle, financial
crises, and geopolitical crises (wars). A recent literature emphasizes the important role financial
intermediaries play in setting asset prices and facilitating transactions (e.g., He and
17

Krishnamurthy (2012)). A withdrawal in the willingness or ability of financial intermediaries to
facilitate transactions may lead to a higher likelihood of failure. Commodity futures markets rely
on the central roles of brokers, custodians, market makers, and other intermediaries to process
trades, produce research, and keep records. The state of the business cycle and banking crises
are two factors that may negatively impact financial intermediation. Major wars also interrupt
normal business operations of financial intermediaries and reduces their ability to facilitate
transactions.
Aside from the factors we have outlined above, failure can occur for other reasons. The Egg
futures contract failed when technological progress dampened the seasonal production cycle of
fresh eggs and diminished the need for hedging the price risk of egg inventories kept in cold
storage (Irwin (1954); Miracle (1972)). Onion futures were outlawed by an Act of Congress after
growers convinced policymakers that futures speculation amplified fluctuations in onion spot
prices. Similar political pressure likely contributed to the demise of Potato futures (Gray (1964)).
Trading volume on Cotton futures sharply dropped after the US government entered cotton
merchandising and began to buy and sell Cotton in a narrow range of prices. Cottonseed Oil
futures was an important market for hedging prior to 1963, when cottonseed oil producers and
users started to boycott this commodity and switched to using Soybean Oil, which offered a way
to hedge most of the price risk (Hieronymus (1971)). While these events make up colorful
episodes in the annals of commodity futures trading, they are not amenable to systematic
analysis.23
In summary, we seek to evaluate the importance of the following factors for contract survival: (i)
a fair compensation for risk as captured by a positive risk premium, (ii) investor concerns about
contract fairness and limited capacity to absorb losses proxied by extreme returns, (iii)
23
Some factors are excluded from our analysis due to data limitations over the 150 year history. For example, trading
volume and market open interest are expected to decline prior to contract failure, and its availability would
potentially provide additional insights into failure dynamics.
18

competition as captured by substitute contracts on the same exchange or among different
exchanges, and (iv) shocks to the financial intermediary system from business cycles, wars, and
banking crises.
Our analysis proceeds as follows. Section 4.2 provides descriptive statistics of contract survival
and variation in risk premiums by survival times. Section 4.3 introduces a statistical model that
links the conditional probability of failure to the risk premium. Section 4.4 investigates factors
other than the risk premium that predict survival.
4.2 Descriptive statistics of contract survival

4.2.1 The survival and hazard functions
Analysis of survival times must consider censoring. While we directly observe the full length of
the lifetime of a failed contract, a contract alive at the end of our sample may continue to survive
beyond the end date. Such a contract is right censored, since its observed lifetime provides a
lower bound estimate of the true survival time. Conventional summary statistics assuming no
censoring would likely underestimate survival times at all quantiles, producing biased values for
both the point estimate and standard errors (Kiefer (1988)). We can learn about the distributional
properties of survival while accounting for censoring using the Kaplan-Meier survival function.
The Kaplan-Meier estimator is a non-parametric method that quantifies the probability of
survival. As such, the Kaplan-Meier function can be treated as a cumulative density function that
adjusts the statistical bias induced by censoring. The probability that a contract survives longer
than 𝜏 month, is given as follows:
𝑑
𝜏
𝑆̂(𝜏) = ∏𝜏𝑘 ≤𝜏(1 − 𝑛 𝑘 ) [2]
𝜏𝑘
where 𝑆̂(𝜏) is the survival function that describes probability of surviving at least until time 𝜏, 𝜏𝑘
is a time during which at least one failure event has occurred, 𝑑𝜏𝑘 is the number of contract
failures at time 𝜏𝑘 , and 𝑛𝜏𝑘 is the number of contracts that have survived up until time 𝜏𝑘 . At any
19

given time, the probability of survival decreases in the fraction of contracts that fail. If no
contracts fail over a time interval, the survival function remains unchanged. If all surviving
contracts fail in the same period, the survival function drops to zero. Most cases fall somewhere
between these two extremes.
The Kaplan-Meier estimator is a common tool in survival analysis widely used in many areas of
research. Survival analysis is frequently utilized in the medical setting to analyze outcomes such
as life expectancy and duration free from symptoms of a disease as related to a treatment (Reid
and Cox, 2018). In the social sciences, survival analysis can be found in labor economics (e.g.,
Keifer (1988)) and demographic studies (e.g., Gury (2011)). Applications of survival analysis to
financial economics include studies of hedge fund survival (e.g., Brown et al., 2001; Liang and
Park, 2010), bank failures (Wheelock and Wilson (2000)), and bankruptcy (Shumway (2001)).
We estimate the Kaplan-Meier survival function using all available contracts. Our estimation
assumes that all contracts share the same survival function; we do not distinguish among
different commodities nor sector membership of the contracts. While these factors can
potentially influence survival, their empirical identification is difficult with a total of just 230
contracts introduced between 1871 and 2022.
The Kaplan-Meier survival function in Figure 3 shows that the probability of contracts failing is
the highest in the years immediately following entry: 10% in the first year, 16% within the first
two years and 20% within the first three years. For years 5, 10 and 20 the probabilities are 26%,
37% and 52%, respectively. 29% of the contracts have been in the database for more than 50
years. For a complementary perspective to the survival function, Panel B of Figure 3 displays the
cumulative hazard function using the Nelson-Aalen estimator:
𝑑
̂(𝜏) = ∑𝜏 ≤𝜏 𝜏𝑘
Λ [3]
𝑘 𝑛 𝜏𝑘
̂(𝜏) is the cumulative hazard function and the right-hand variables are the same as those
where Λ
defined for Equation [2]. The cumulative hazard function describes the concept of the total
accumulated risk of failure for the time interval from 0 to 𝜏; a higher value indicates a lower
20

probability of survival. For example, the cumulative hazard function has a value of 1.24 for a
contract that has survived for 50 years, which translates to a survival probability of 𝑒 −1.24 = 29%
at that horizon.24 The slope of the cumulative hazard function provides an estimate of the hazard
function – the risk of failure at a specific point in time – a steeper first derivative suggests a
greater number of failures per unit time. 25 If the conditional probability of contract survival were
constant through time, the cumulative hazard function would be a straight line. The shape of the
cumulative hazard function suggests that the failure probability changes throughout a contract’s
life. Like the survival function, we observe that the conditional failure rate is the highest in the
first two years after contract introduction, followed by a lower rate of failure from years two
through 10. After 10 years, the probability of failure per unit time drops again and remains
roughly constant for several decades.
Panel B of Table 2 contains quantiles of contract survival times from the Kaplan-Meier survival
function. Across all contracts, the average survival time is 33.9 years (with a 95% confidence
interval between 27.1 and 40.7 years). However, half of all contracts do not survive past 17.8
years (95% confidence interval between 13.9 and 25.3 years). 75% of all contracts survive for at
least 4.6 years, and 25% survive at least 55.2 years. Survival times show a distinct long right tail
– the distribution is right-skewed – the mean is almost double the median, and 10% of contracts
survive for longer than 91.3 years. Carlton (1984) computes hazard ratios for a set of commodity
and financial futures from 1921 to 1983. Consistent with our results, he also finds that contracts
fail at the fastest rate in the two years after their introduction, which slows down with age.
Compared to Carlton’s estimates, we find lower probabilities of failure at each point in a
24
If the survival function 𝑆(𝜏) were absolutely continuous, then it is related to the cumulative hazard function 𝛬(𝜏)
as follows (Hosmer et al., 2011):
𝑆(𝜏) = 𝑒 −𝛬(𝜏)
25
The cumulative hazard function 𝛬(𝜏) is the integral of the hazard function 𝜆(𝜏):
𝜏
Λ(𝜏) = ∫ 𝜆(𝑢)𝑑𝑢
0
21

contract’s life, perhaps due to differences in the composition of contracts and distinct time
periods. Carlton also only calculates failure probabilities for the first 20 years of a contract’s
lifetime, while our estimates span more than 100 years.
Descriptive statistics from the Kaplan-Meier survival function indicate that not all contracts are
created equally. While some contracts enjoy extraordinarily long lifetimes of over 100 years,
many more contracts fail in a much shorter time. In the early years following the initial trading of
a new contract, market participants have limited knowledge of the contract, and factors
influencing survival are of especially acute concern. It is this period in a contract’s life that sees
the highest failure probability. As market participants gain familiarity and understanding of a
contract, its probability of failure declines.
4.2.2 The risk premium across survival time

Panel C of Table 2 divides contracts into bins based on their observed survival time. The
breakpoints for bins are guided by the shape of the Kaplan-Meier function. The bins are organized
such that the probability of failure within each bin is approximately constant, and the breakpoints
intuitively correspond to different stages of a contract’s development. 36 contracts (16% of the
total) appear in the database for a period shorter than two years, and none of these contracts
survive until the end of our sample. 21% of contracts survive between two and 10 years, and
subsequently fail. By construction, contracts with longer observed lifetimes are also more likely
to survive until the end of the sample. For those 48 contracts in the database for more than 50
years, 44% survive until the end of the sample.
The bottom part of Panel C presents average and median risk premium estimates for each of the
survival bins. The 36 contracts that do not survive past two years have an average excess return
of −8.00% annualized (median = −0.52%). Just one-half of the contracts in this group earned
positive average excess returns prior to disappearing. In comparison, the 194 contracts that
survive for at least two years earned considerably higher average excess return of 2.81% per year
22

in the first two years since their introduction. The 49 contracts that fail between two and 10 years
have an average excess return of 0.12% annualized, whereas the 145 contracts that survive for
at least 10 years have an average excess return of 4.88% per annum in the first 10 years. In each
case, the contracts that survive past a certain time period have higher average excess returns
compared to contracts that fail within the same period. Among the contracts with the longest
survival times (>50 years) both the average and the median risk premium exceed 5% per annum.
The proportion of contracts earning a positive premium increases with survival time: from 59%
for those that survive between two and 10 years to 94% for contracts with survival times in excess
of 50 years. Average risk premiums do not exhibit much variation beyond survival times of 10
years, consistent with the conjecture of that survival prohibits excessively high risk premiums to
accrue to either side of the contract.
The connection between risk premiums and survival is further illustrated in Figure 4, which
provides a scatterplot of the average contract excess returns against survival time. The surviving
contracts are represented by red dots and the defunct contracts are represented by blue dots.
Panel A shows that contracts with longer survival times tend to have positive risk premiums. The
large majority of contracts with an observed lifetime exceeding 400 months has a positive risk
premium, even for those contracts that eventually failed. Conditional on surviving for at least 800
months, all contracts (defunct or not) have a positive risk premium.
Shorter-lived contracts exhibit substantial dispersion in their average realized excess returns. This
can in large part be attributed to sampling variation. What is masked by sampling variation is that
short-lived contracts have earned lower average returns. To get a sense of the statistical
significance of the risk premiums in Panel A, we construct 95% confidence intervals around zero.
Because it is difficult to estimate the volatility of contracts with short return histories, we assume
that the excess returns for all contracts are drawn from the same distribution, such that the
standard error depends only on the full sample standard deviation and the number of months a
contract is in the sample. Panel B shows that the average premiums of many long-lived contracts
23

significantly exceed zero, and currently surviving contracts are overrepresented in this group. Of
the 52 contracts with a statistically significant risk premium estimate, 35% continue to trade at
the end of our sample. This fraction is larger compared to the full set of contracts; 21% of 230
contracts continue to trade at the end of the sample. Contracts with a significantly negative risk
premium are few in number (7) and tend to have shorter lives. UK Natural Gas is the only example
of a surviving contract with a statistically significant negative risk premium.
We can now reconcile the difference between the sizable impact of survivorship on estimates of
the commodity risk premium at the contract level compared to the observation level,
documented in Panel A of Tabe 2. By construction, short-lived contracts have a limited impact on
the observation-level risk premium estimates (because they contribute proportionally fewer
observations to the sample), but receive the same weighting as long-lived contracts in the
calculation of the cross-sectional contract-level average. A large survivorship bias at the contract
level compared to a negligible bias at the observation level therefore supports the notion that
the absence of a risk premium negatively affects survival times.
Consistent with the conjecture of Gray and Keynes, a positive risk premium appears to be a
necessary but not sufficient condition for contract survival. A positive risk premium does not
guarantee a long survival time, but a negative risk premium likely leads to early failure. Because
other factors may also lead to failure, not all short-lived contracts have a negative risk premium.
A proper statistical analysis which accounts for censoring is required to fully explore the
relationship between risk premiums (and other factors) and survival times, which we turn to in
the following section.
4.3 Does the risk premium predict contract survival?

We estimate Cox proportional hazards models to formally test and identify factors that influence
the probability of survival. The dependent variable in the Cox model is the hazard function, 𝜆(𝜏),
24

which can be interpreted as the risk of failure at a time 𝜏 conditional on survival until that time.26
For a set of covariates 𝑋𝑖,𝜏 , the hazard function conditional on these variables is given as follows:
𝜆(𝜏|𝑋𝑖,𝜏 ) = 𝜆0 (𝜏)𝑒 𝑋𝑖,𝜏𝛽 [4]
where 𝜆0 (𝜏) is a baseline hazard function which summarizes how the risk of failure evolves over
time at baseline levels of covariates. 𝑋𝑖,𝜏 = [𝑥𝑖,1,𝜏 , … , 𝑥𝑖,𝑀,𝜏 ]′ is a vector of 𝑀 covariates at time 𝜏
which may alter the probability of failure. We allow 𝑋𝑖,𝜏 to change over time since the hazard
function may depend on the current values of the covariates rather than their values at the time
of contract introduction. For example, whether a contract experiences a recession changes over
the course of the economic cycle, so exposure to recessions is a time-varying covariate. This setup
subsumes the case that a covariate remains constant, which allows us to combine fixed and time-
varying covariates in the same model.27
𝛽 is an 𝑀 × 1 vector of coefficients which captures how covariates impact the risk of failure.
Although covariates are allowed to vary through time, their influence on the hazard function, 𝛽,
is constant. The impact of a change of Δ𝑥𝑖,𝑚,𝜏 on the hazard function is 𝑒 Δ𝑥𝑖,𝑚,𝜏𝛽𝑚 . If this value
were greater (smaller) than one, then Δ𝑥𝑖,𝑚,𝜏 is associated with a higher (lower) probability of
failure compared to the baseline. If 𝑥𝑖,𝑚,𝜏 were an indicator variable with coefficient 𝛽𝑚 , its effect
on the hazard function is 𝑒 𝛽𝑚 : 𝛽𝑚 > 0 indicates that the hazard function is elevated when
𝑥𝑖,𝑚,𝜏 = 1, and the conditional probability of failure at time 𝜏 is higher for contract 𝑖. If 𝑥𝑖,𝑚,𝜏 were
a continuous variable, the impact of a change of 𝑎 units would be a multiplicative factor 𝑒 𝑎𝛽𝑚 on
the hazard function.
The Cox model encapsulates the intuitive notion of comparing the characteristics of contracts
that fail with those that do not. At the time of each contract failure, the model compares the
covariate values of the failed contract with those that were at risk but did not fail. The strength
26
Let 𝐹(𝜏) = 1 − 𝑆(𝜏) be the cumulative distribution function that describe the probability of failure, and 𝑓(𝜏) =
′ 𝑓(𝜏)
𝐹 (𝜏) be its associated probability density function. The hazard function is then given by 𝜆(𝜏) = .
1−𝐹(𝜏)
27
If a covariate 𝑚 remains constant, then we have 𝑥𝑖,𝑚,𝜏 = 𝑥𝑖,𝑚 , ∀𝜏.
25

of association between a covariate and contract failure is determined by the difference in
covariate values across the two groups.
4.3.1 Hazard model estimates

We first investigate the link between contract survival and risk premiums. A natural test is to
compare the risk premium of surviving contracts with those that failed. However, using the full
history of a contract to calculate its risk premium poses two problems. First, a long-surviving
contract, with more observations, has a more reliable estimate of the risk premium compared to
a short-lived contract. If we wanted to establish a link between risk premium estimates and
contract survival, our inference would be confounded by cross-sectional differences in sampling
variation. Second, using the full history embeds a look-ahead bias. Investors faced with a newly
listed contract without any prior history will want to understand whether the contract provides
a fair exchange of the cost and benefit of insurance, and they cannot use future information to
do so.
To address the above problems, we calculate risk premium estimates for each contract separately
using an expanding window, emulating the process by which market participants learn about the
risk premium of a newly introduced contract. For example, to evaluate the likelihood of failure
of a contract at the end of month 15 since its introduction, we assign a risk premium estimated
using the first 15 months. This approach avoids the look-ahead bias, as well as offers a
comparison of risk premiums unaffected by cross-sectional differences in sampling variation. A
risk premium comparison at the end of month 15 uses the same amount of data for all contracts,
regardless of their lifetimes, such that short-lived and long-lived contracts have the same
sampling variation for this comparison.
Table 3 shows that the coefficient associated with risk premium estimates is −4.95 (p-value =
0.14). The economic magnitude of this coefficient can be better understood by transforming it
into a hazard ratio. For a one standard deviation increase in the risk premium estimate (2.4%),
26

the hazard ratio is 0.89.28 That is, the conditional probability of failure is 11% lower for a one
standard deviation increase in the risk premium.
The Cox model operates in event time, treating 𝜏 as survival time instead of calendar time. As
such, comparisons of risk premium estimates may occur at drastically different points in calendar
time. For example, the risk premium of a contract introduced in the 1800s may be compared with
the risk premium of a contract introduced in the 1990s – more than 100 years apart. Existing
literature documents that realized returns of commodity futures vary over time and across
business cycles (Gorton and Rouwenhorst (2006)). Commodity futures returns tend to be
procyclical, exhibiting higher averages in expansions and lower averages in recessions. If we
compare the risk premium estimate of a contract introduced in a recession versus one introduced
in an expansion, the former will tend to have a lower risk premium estimate due to the general
procyclical nature of commodities rather than reasons related to survival. Therefore, the
relationship between risk premiums and contract survival may be confounded by aggregate
shocks to the commodities complex during different stages of the economic cycle.
We overcome the above issue by constructing a new covariate as the difference between the
raw risk premium estimate and the excess return of an equally-weighted commodity index during
the same time period. This difference variable adjusts for the ex-post variation common to all
commodities, thereby allowing for a fairer comparison across contracts introduced at different
points in history. Column (2) illustrates that the difference variable carries a coefficient of −6.44
(p-value = 0.08), significant at the 10% level. A one standard deviation change in this covariate
(2.2%) leads to a hazard ratio of 0.87, a 13% decrease in the conditional probability of failure.
Lastly, we a construct an indicator variable that takes on the value of one if the risk premium
estimate of a contract exceeds the equally-weighted commodity index excess return in the same
period, and takes on a value of zero otherwise. Risk premiums are notoriously difficult to estimate
(e.g., Merton (1980)), and this binary variable stabilizes the risk premium covariate by focusing
28
The calculation is 𝑒 −4.95×0.024 = 0.89.
27

on its sign. Column (3) shows that this indicator variable has a coefficient of −0.35 (p-value =
0.02), significant at the 5% level. Due to different units, the coefficient of the indicator variable
cannot be directly compared to those of the risk premium estimates. Converted into a hazard
ratio, this coefficient implies that contracts with risk premium estimates exceeding the excess
return on the equally-weighted index are 30% less likely to fail (hazard ratio = 0.70).
It is especially difficult to pin down the risk premium in the early part of a contract’s life. In the
first 12 months after contract introduction, we rely on fewer than a dozen observations to
estimate a risk premium which results in enormous sampling variation. Moreover, for a newly
introduced contract, extreme returns are likely a more relevant factor influencing survival than
its risk premium, since the variation in extreme returns overwhelms cross-sectional differences
in risk premiums over short horizons. For these reasons, the relationship between contract failure
and risk premiums is attenuated in the months immediately following contract introduction.
We restrict our sample to contracts that survive for at least 12 months, and repeat our Cox
regression analysis. Column (4) shows that the coefficient associated with the risk premium
becomes −9.35, statistically significant at the 10% level. A one standard deviation increase in the
risk premium is associated with a 20% decrease in the conditional probability of failure (hazard
ratio = 0.80). The difference variable which adjusts the risk premium estimate with the equally-
weight index excess return is associated with a coefficient of −12.96 (significant at the 5% level)
and a hazard ratio of 0.75, which indicates a 25% decrease in the conditional probability of failure.
Finally, the indicator variable suggests that contracts with risk premium estimates exceeding the
excess returns on the equally-weighted index are 32% less likely to fail (hazard ratio = 0.68).
The findings in Table 3 illustrate a crucial link between contract survival and risk premiums,
lending support to the idea that a fair compensation for risk is necessary for the development of
a new financial innovation. In commodity markets, a fair risk compensation induces speculative
market participation, and the requirement of speculative capital for the functioning of
commodity futures markets manifests in a positive association between a positive risk premium
28

and contract survival. This association is more difficult to detect in the early part of a contract’s
life, but becomes more apparent at longer horizons and with more stable risk premium
estimates.
4.4 Additional factors influencing survival

4.4.1 Extreme returns
Aside from a fair compensation for risk, other factors may lead to the success or failure of a
contract. In this section, we test the hypothesis that extreme returns increase the probability of
failure. When one side of the futures market sustains persistent losses, those market participants
eventually withdraw from the market and the fairness of the contract comes into question.
Without the support of market participants on both sides of the market, the contract can no
longer serve the economically important function of risk transfer. We further conjecture that
sensitivity to extreme returns is higher in the early stage following introduction, as market
participants are still familiarizing themselves with novel markets and concerns about fairness may
not be fully resolved.
We capture the notion of extreme returns through a cross-sectional ranking of commodity
returns. Those contracts whose recent period returns fall into the top or bottom 10% when
compared to other concurrently existing contracts are designated as “extreme”. For each
contract, an indicator variable is set equal to one in the period that the contract shows an
extreme return, and zero otherwise.
Panel A of Table 4 shows that the probability of failure is 33% higher (hazard ratio = 1.33) for
contracts whose most recent 12-month returns fall into the top or bottom 10% of the cross-
sectional distribution. Although this result is consistent with the prediction of Gray’s hypothesis,
the estimate is not statistically significant. We evaluate the differential impact of extreme returns
on hedgers and speculators by separately studying the top and bottom deciles. Extreme negative
returns lead to a 47% increased failure probability (hazard ratio = 1.47), significant at the 10%
29

level, while extreme positive returns do not alter the failure probability (hazard ratio = 1.09). This
finding is consistent with the observation that net market exposure of long speculators is larger
than hedgers who are on net short. Futures losses incurred by hedgers are partly offset by gains
in the underlying asset; hedgers are protected by outside positions whereas speculators are not.
As such, hedgers are in a better position to weather large losses brought by top decile returns,
while speculators must fully bear losses in the bottom decile.
As shown in Section 4.2, many contracts fail early in their lives. We zoom in on the first few years
after contract introduction, and we find that extreme negative returns are strongly associated
with contract failure. In the first five years after introduction, a contract that experiences a 12-
month return in the bottom decile has an increase in failure probability of 180% (significant at a
1% level). We show in Appendix Table A2 that this estimate remains robust when considering
different time periods after introduction.
Our results indicate that extreme returns are associated with a greater likelihood of failure. It is
important to distinguish extreme positive returns from extreme negative returns, as the market
participants impacted by these extremes respond differently. Extreme negative returns raise the
probability of failure, especially early in a contract’s life, while incidence of extreme positive
returns have limited impact on the likelihood of failure.
4.4.2 Competition among contracts

An exchange may introduce a new contract to replace an existing contract on the same exchange
or to draw business away from an existing contract listed on a competing exchange. In the former
case, the new “improved” contract is intended to survive at the expense of the old contract,
which is expected to fail. Even though planned obsolescence is expected to increase the
probability of failure for the old contract, the failure rate of the new contract may also be
elevated relative to the baseline hazard when there is uncertainty around market adoption of
the contract improvement.
30

In the case of a contract introduction that competes with an existing contract traded elsewhere,
the expectation is that the incumbent contract is in a strong position relative to the newcomer.
The newcomer is likely to be relatively illiquid, which makes it hard to compete with the
established liquid and better-known alternative. The new contract is therefore expected to have
a higher probability of failure, whereas the incumbent, successful contract may be expected to
be more likely to survive. We test these hypotheses using indicator variables to capture the
introduction of new contracts. On the same exchange, the hazard ratio of an indicator variable
for the new contract should be less than one and the hazard ratio of an indicator variable for the
old contract should be greater than one. Across exchanges, the hazard ratio of the new contract
indicator variable should be greater than one, whereas the hazard ratio of the old contract
indicator variable should be less than one.
Panel B of Table 4 tests the effect of listing substitute contracts for survival. If a new substitute
contract is introduced on a different exchange, the probability of failure of the existing contract
remains unchanged (hazard ratio = 0.82, not statistically distinguishable from 1) while the
probability is 72% higher for the new contract (hazard ratio = 1.72). In Cox proportional hazards
regressions, indicator variable covariates have hazard ratios which compare to the same baseline
hazard function. As such, ratios of these hazards provide us with an across-group comparison.
Columns (3) and (4) of Panel B imply that across exchanges, the hazard function of the new
contract is 1.72/0.82 = 2.10 that of the old contract, which indicates that the new contract is
110% more likely to fail compared to the old contract.
Across exchanges, new substitutes are likely introduced when a successful competing contract is
trading on a different exchange. Our results are in line with the conjecture that when different
exchanges compete for market participants on the same type of contract, the new substitute
contracts are likely out-competed by incumbent contracts. The presence of a substitute
commodity in the market lowers the likelihood of survival of a new contract introduction. This is
31

consistent with a first-mover advantage where the original contract attracts liquidity, open
interest, and trading volume, thereby creating a hurdle for new entrants.
Columns (1) and (2) show that if a new substitute contract is introduced on the same exchange
as an existing contract, the failure probability of the old contract rises by 112% (hazard ratio =
2.12) compared to 155% (hazard ratio = 2.55) for the new contract. That is, the old contract
becomes just over twice as likely to fail compared to a typical contract, while the new contract
becomes 2.5 times more likely to fail. The ratio of the hazard ratios suggests that the new
contract is 20% more likely to fail than the old contract.
Our empirical results reject the hypothesis that a new substitute contract on the same exchange
is more likely to survive because they are supported by the exchange. Financial innovation proves
difficult – exchanges may not excel at designing new contracts. What is intended to be an obvious
innovation may in fact turn out to be a marginal improvement for traders who may be reluctant
to switch to the newer contract. Furthermore, an exchange may be more likely to introduce a
new substitute contract when the existing contract is not doing well, and simultaneous trading
of two contracts in a commodity at the same time can be confusing to speculators and hedgers
(Hieronymus (1971)). The above considerations potentially explain the elevated probabilities of
failure for both the existing and newly introduced contracts.
4.4.3 Trading disruptions and macroeconomic events

We define an indicator variable that takes on a value of one if a contract recently experienced a
major war. Panel C of Table 4 shows that if the most recent month of a contract’s life falls within
WWI or WWII, its probability of failure is increased by 59%. If the most recent six (12) months of
a contract’s life falls within the world wars, the contract’s probability of failure is 63% (57%)
higher, significant at a 5% level. A contract that experiences WWI or WWII in the last 24 months
still has a 37% increase in failure probability, although this estimate is not statistically significant.
32

Evidently, the disruption in the economy and the financial sector brought on by wars negatively
influences the chances of survival.
The prevailing state of the macroeconomy can also affect both the willingness and capacity of
financial intermediation. During a recession, banks and brokers tend to reduce their risk
exposure. We create indicator variables of whether a contract was recently exposed to a
recession as defined by the NBER. Whether a contract’s most recent one month, 12 months, of
24 months were in a recession does not seem to impact its failure rate, as none of the coefficients
is statistically distinguishable from zero. In fact, the point estimates from the Cox regressions
indicate that exposure to recessions tend to decrease the probability of failure. This
counterintuitive result arises due to the regular occurrence of recessions. Long-lived contracts
necessarily experience multiple business cycles, surviving through each recession. Short-lived
contracts do not experience many recessions, making it seem like for every contract that failed
in a recession, many others survived through recessions.
Since most contracts in our sample are traded in the US and UK, we use banking crises (Reinhard
and Rogoff (2009)) in these countries as an additional proxy for the capacity of financial
intermediation. Whether a contract is exposed to a banking crisis in the previous 12 or 24 months
does not materially impact the probability of failure. Like in the case of recessions, point
estimates of hazard ratios are smaller than one, which suggests that the data contain more
instances of contracts surviving rather than perishing through banking crises.
4.4.4 Discussion
We have grouped potential determinants of contract failure into categories including risk
premiums, extreme returns, substitute contracts, wars, and macroeconomic events. Our analysis
thus far has mostly focused on the within-category predictive power. How does predictive power
compare across covariates?
33

On the one hand, if multiple covariates capture the same underlying economic mechanism, in
multivariate tests only the most precisely measured variables will be statistically significant. On
the other hand, if there are several economic channels that lead to contract failure, covariates
from different categories should retain their individual predictive power when combined in a
multivariate model. Panel E shows that when examined jointly, there are two groups of
covariates strongly associated with contract failure: A positive risk premium and the presence of
substitute contracts. If a contract’s risk premium exceeds the equally-weighted index in the same
period, its probability of failure is consistently 31% lower controlling for other covariates. The
introduction of a new substitute contract to an existing one on the same exchange raises the
probability of failure for both contracts. Extreme returns in the bottom decile of the cross-
sectional distribution is also related to contract failure, raising the hazard ratio by about 35% with
a statistical significance at the 10% level. In the presence of other covariates, the positive
relationship between wars and contract failure can no longer be distinguished from noise.
5. Distributional properties of commodity futures returns

The relationship between a fair compensation for risk and survival suggests an important role for
risk premiums in the success of financial innovations. We further explore the multi-period return
distributions of commodity futures returns to shed light on this issue.
In a recent study, Bessembinder (2018) documents that when measured over their lifetimes, the
majority of individual stocks do not outperform one-month Treasury Bills. He reports that 57% of
lifetime excess returns of individual stocks are negative. The frequent incidence of bankruptcy
further shapes the distribution of cumulative lifetime returns such that its mode is −100%. A
similar conclusion applies to global stocks, albeit measured over a shorter time period
(Bessembinder et al. (2019)). These results highlight the importance of positive skewness in asset
returns and challenge the intuitive presumption that the typical stock earns a positive risk
premium.
34

We examine the multi-period return distribution of commodity futures returns. To facilitate
comparison with Bessembinder, we construct total returns as the product of individual
commodity excess returns and one-month T-Bill returns.29 Following Bessembinder (2018), multi-
period returns are calculated as rolling buy-and-hold strategies. Figure 5 provides the empirical
distributions of overlapping buy-and-hold returns for individual commodities at the annual, 10-
year, and lifetime horizons, overlaid with the empirical distributions of individual stock returns
documented in Bessembinder (2018).30
At the annual horizon, commodities and equities do not appear dissimilar, except that equity
market returns are more dispersed when compared to commodity markets. Both the left and
right tails are fatter for stocks than for commodities. Like stock returns, the mode for commodity
returns is zero, and we observe positive skewness. The means and medians, as well as the
incidence of positive excess returns are similar at the annual frequency for both asset classes, as
shown in Table 5. Although the two distributions appear visually similar, a Kolmogorov-Smirnov
test of equal distributions is rejected at the 1% level.
Table 5 shows that at lower frequencies, the two distributions become more distinct. Unlike
equities, the mean, median, and skewness for individual commodities increase with the
investment horizon. While the fraction of stocks outperforming T-bills decreases as the holding
period lengthens, this figure rises for commodities. The fraction of positive excess returns
increases from 51.9% to 58.7% for commodities but drops from 51.6% to 42.6% when comparing
annual to lifetime returns for individual stocks. The last two panels of Figure 5 accentuate an
additional important difference between the two distributions at lower frequencies. Driven by
frequent bankruptcies, the most common outcome of the stock return distribution becomes
−100% for a holding period of 10 years, whereas the most common return for commodities is
29
T-Bill returns are based on Ibbotson Associate’s 30-Day Treasury Bills Total Returns from 1926-2022. Prior to
1926, we use data from Siegel, J. J. (1992), “The real rate of interest from 1800-1990 A study of U.S. and U.K.”
Journal of Monetary Economics 29: 227-252.
30
We thank Hank Bessembinder for sharing these data.
35

around −30%. Although a large fraction of commodity contracts fails within 10 years, the delisting
return is not necessarily −100%.31 The lifetime return distributions of commodities and stocks
further diverge. Our dataset includes 230 commodity contracts, two orders of magnitude smaller
compared to the number of stocks over a similar time period. As a result, the lifetime empirical
distribution of commodity returns is rather uneven. For an easy visual comparison between
commodities and stocks, we include a smoothed kernel density of commodity returns. Whereas
lifetime stock returns have a high probability of being −100%, the most common outcome for
lifetime commodity returns remains closer to zero. Kolmogorov-Smirnov tests also reject the null
of equal return distributions at the 1% level for 10-year and lifetime return distributions.
The sharp differences between the two distributions at longer horizons likely reflect the distinct
economic roles played by equity and commodity futures markets. Equities are residual claims to
corporate assets, and in a one-sided bet the prospect of large payoffs can provide a sufficient
offset to the risk of a −100% return in bankruptcy. As hypothesized by Gray (1961), hedging
markets are fundamentally different because they are two-sided to accommodate the transfer
of price risk. For that reason, returns to both sides of the contract need to remain balanced for
the market to remain viable.
6. Conclusion
In this paper, we study the factors that determine the success or failure of financial innovations
after their introduction. Our investigation focuses on the universe of commodity futures, which
fall under the definition of financial innovation put forward by Merton (1995) and Tufano (2003)
as they act as insurance markets that offer market participants improved ability to manage
unwanted price fluctuations and control risk. The financial innovation literature has suggested,
but seldomly tested, factors associated with the survival and success of new innovations, and the
31
Although 10-year commodity returns resemble a lognormal distribution, a Kolmogorov-Smirnov test rejects this
hypothesis at the 5% level.
36

empirical identification of such factors remains elusive. We fill in this gap through formal tests of
hypotheses drawn from the literature on financial intermediation and the literature on
commodity futures, including the presence of a risk premium to facilitate risk transfer (Keynes
(1923, 1930)), questions about contract fairness and investor aversion to persistent losses (Gray
(1960)), competition among contracts and across exchanges (Hieronymus (1971), Silber (1981),
Tufano (1989)), and the role of financial intermediaries (He and Krishnamurthy (2012)). To test
the above hypotheses, we use a novel dataset of futures prices going back 150 years, beginning
at the inception of futures trading in the United States.
Kaplan-Meier survival estimates show that failure is most likely in the months immediately
following contract introduction and gradually declines with age. Consistent with the Keynesian
view, the short-lived contracts on average earn a negative risk premium whereas contracts that
survive for longer periods earn on average a positive premium. In particular, 94% of contracts
that survive for more than 50 years earn a positive lifetime risk premium. Moreover, for those
commodities, the premiums across contracts fall in a relatively narrow range, consistent with the
conjecture by Gray that survival requires gains and losses to both sides of a futures contract to
be moderate for continued market participation. By estimating Cox proportional hazards models,
we are the first to establish a statistically reliably negative association between a positive risk
premium and the likelihood of contract failure. Moreover, we examine whether several other
factors contribute to the likelihood of failure. In addition to the risk premium and the incidence
of extreme returns, we find that competition measured as the availability of substitute contracts
is correlated to contract failure. We find less support for factors related to shocks to the
intermediary sector such as wars, recessions, or financial and banking crises.
Taking advantage of the length and coverage of our database, we also contribute to the literature
on commodity futures by examining whether prices set by market participants embed a risk
premium. In a comprehensive sample of contracts, we find strong support for the presence of a
commodity risk premium. Across contracts and time, the arithmetic average risk premium is
37

5.82% annualized, and an equally-weighted index of all commodities earns a premium of 5.60%
between 1871 and 2022. The long-term premium is remarkably uniform across sectors and in
sub-samples. Perhaps surprisingly, the market-wide risk premium estimates are relatively
insensitive to the inclusion of defunct contracts.
While the particular context we study centers around commodity futures markets, the factors
we identify, such as a proper compensation for risk, concerns about instrument fairness, market
participants’ capacity to handle sustained losses, competition among available products, and
exposure to shocks in the intermediary sector are not restricted to commodity markets and likely
play a role in shaping financial markets more broadly. We leave the question of whether these
factors extend to other financial innovations as an interesting avenue for future research.
38

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43

Table 1: The commodity risk premium over 150 years
This table provides risk premium estimates for commodity futures calculated using monthly futures price data
𝑇
between January 1871 and March 2022. Monthly excess returns for each contract are defined as (𝐹𝑡+1 − 𝐹𝑡𝑇 )/𝐹𝑡𝑇 ,
where 𝑇 denotes the maturity of the front-month futures contract. Three estimates of the commodity risk premium
using different methods for averaging across contracts and time are shown in Panel A. The risk premium “By
Observation” is obtained by taking a simple average across all 69,444 monthly excess return observations, treating
each monthly excess return as a separate observation of the risk premium. “By Contract” measures the average risk
premium at the contract level: after calculating the time-series average premium for each contract, we report the
cross-sectional average of these time-series means. “Index” refers to a monthly rebalanced, equally-weighted
commodity index, constructed after aggregating commodities by location. Panel B shows the average risk premium
by observation, by contract, and calculated as equally-weighted indexes across sectors. The fraction of non-negative
observations are shown in parentheses.
Panel A: Full Sample Summary Statistics

By Observation By Contract Index
Average Premium 5.82% 2.72% 5.60%
Number of Observations 69444 230 1815
t-Stat 15.25 1.76 4.79
Geometric Returns 1.67%* 4.67%
Fraction Non-Negative 0.52 0.59 0.54
* Median geometric returns
Panel B: Premiums by Sector

Softs Animal Products Grains & Energy Precious Industrial
Oilseeds Metals Metals
5.53% 4.00% 5.83% 12.17% 4.20% 6.22%
By Observation
(0.52) (0.52) (0.51) (0.53) (0.51) (0.52)
5.56% 2.24% -1.37% 6.54% 3.28% 7.87%
By Contract
(0.57) (0.62) (0.48) (0.67) (0.45) (0.89)
5.39% 4.24% 5.55% 12.40% 4.71% 6.03%
Index
(0.53) (0.52) (0.52) (0.54) (0.56) (0.52)
44

Table 2: Descriptive statistics for contract survival and risk premiums
This table presents descriptive statistics for contract survival. Panel A contains estimates of the annualized
commodity risk premium and volatility using three different aggregation levels. “By Observation” is obtained by
taking a simple average across monthly excess return observations, treating each monthly excess return as a
separate observation of the risk premium. “By Contract” measures the average risk premium at the contract level:
after calculating the time-series average premium for each contract, we report the cross-sectional average of these
time-series means. “Index” refers to a monthly rebalanced, equally-weighted commodity index, constructed after
aggregating commodities by location. Surviving contracts are those that are alive at the end of our sample in March
2022, and non-surviving contracts are those that have ceased trading prior to the end of the sample. Panel B contains
summary statistics for survival times from estimating a Kaplan-Meier survival function that offers quantile estimates
accounting for censoring. Panel C displays descriptive statistics of the distribution for “By Contract” average excess
returns grouped by the length of their contract life. “Significant at 5% Level” is the fraction of contracts with average
excess returns significantly different from zero at the 5% level.
Panel A: Risk premium comparisons

By Observation By Contract By Index
All Surviving Non-Surviving All Surviving Non-Surviving All Surviving
Average Excess Return 5.82% 5.66% 5.96% 2.72% 6.26% 1.79% 5.60% 5.87%
Volatility 29.06% 29.22% 28.92% 26.60% 27.16% 26.44% 14.37% 17.31%
Median Excess Return 5.12% 5.94% 4.82%
Panel B: Contract survival (years)

Mean 10th 25th Median 75th 90th
KM Survival Function 33.9 91.3 55.2 17.8 4.6 0.6
KM 95% CI Lower Bound 27.1 78.5 45.4 13.9 3.1 0.4
KM 95% CI Upper Bound 40.7 . 66.3 25.3 7.5 0.9
Panel C: Individual contracts by bins

Survival Time < 2 Years 2-10 Years 10-50 Years > 50 Years All
Number of Commodities 36 49 97 48 230
Number Surviving 0 0 27 21 48
Average Excess Return -8.00% 0.12% 6.77% 5.22% 2.72%
Median Excess Return -0.52% 4.09% 6.06% 5.06% 5.12%
Fraction of Avg Excess Ret > 0 0.50 0.59 0.78 0.94 0.73
Significant at 5% Level 11% 10% 29% 31% 23%
45

Table 3: Risk premium and contract failure
This table reports estimated coefficients based on the Cox proportional hazards regressions allowing for time-varying
covariates 𝑋𝑖,𝜏 that are measures of the commodity risk premium:
𝜆(𝜏|𝑋𝑖,𝜏 ) = 𝜆0 (𝜏)𝑒 𝑋𝑖,𝜏𝛽
where 𝜆(𝜏|𝑋𝑖,𝜏 ) is the hazard function, and 𝜆0 (𝜏) is a baseline that summarizes the common time variation in the
risk of failure across contracts. We estimate risk premium for each contract separately using an expanding window.
“Risk Premium” is the estimated risk premium. “RP − EW Index” is the difference between the estimated risk
premium of a contract and the excess returns of an equally-weighted commodity index over the same period. “1(RP
> EW Index)” transforms “RP − EW Index” into a binary variable that equals one if the difference is positive and zero
otherwise. The hazard ratio is computed for a one standard deviation increase in the covariate in the case of a
continuous variable, or for a change from 0 to 1 in the case of an indicator variable. The top panel includes all
contracts; the bottom panel restricts the sample to only those contracts that survive for at least 12 months. P-values
are shown below the coefficients, and ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels.
Hazard
(1) (2) (3) (4) (5) (6)
Ratio
All Contracts
Risk Premium -4.95 0.89
0.14
RP - EW Index -6.44* 0.87
0.08
1(RP > EW Index) -0.35** 0.70
0.02
Contracts with Life ≥ 12 months
Risk Premium -9.35* 0.80
0.08
RP - EW Index -12.96** 0.75
0.03
1(RP > EW Index) -0.39** 0.68
0.02
Log likelihood -848 -848 -847 -724 -723 -722
46

Table 4: Drivers of contract failure
This table provides estimated hazard ratios based on the Cox proportional hazards regressions allowing for time-
varying covariates 𝑋𝑖,𝜏 :
risk of failure across contracts. All covariates are indicator variables, so the hazard ratio is simply the exponentiation
of the estimated coefficient. Panel A presents covariates related to extreme returns. Each month, all available
contracts are ranked based on their past 12-month returns (at least six months of returns is required for inclusion).
The indicator variables are turned on depending on whether a contract is in the top or bottom 10% of this cross-
sectional distribution. The final row in Panel A restricts the sample to only the first five years after contract
introduction. Analysis of substitute contracts are in Panel B. For a particular contract, the covariates are based on
whether there is another contract of the same commodity that started trading earlier (which makes this the “new
contract”), or whether there is another contract of the same commodity that started trading later (“old contract”).
We make a distinction between substitutes on the same exchange (e.g., Sugar No. 5 and Sugar No. 6, both traded in
New York) or on different exchanges (e.g., Chicago Corn and Buffalo Corn). Results on wars are shown in Panel C.
Covariates turn on if the most recent 1, 6, 12, or 24 months of a contract coincided with World War I or World War
II. Covariates related to macroeconomic events including NBER-defined recessions and banking crises in the US and
UK as defined by Reinhard and Rogoff (2009). Panel E shows results including multiple groups of covariates. P-values
are shown below the coefficients, and ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels.
Panel A: Extreme Returns

(1) (2) (3) (4)
1 (if last 12 month return in top or bottom decile) 1.33
0.14
1 (if last 12 month return in the top decile) 1.09
0.76
1 (if last 12 month return in the bottom decile) 1.47*
0.10
1 (if last 12 month return in the bottom decile), only months 0-60 2.80***
0.01
Log likelihood -711 -712 -711 -179
Panel B: Substitute Contracts

(1) (2) (3) (4)
1 (old contract, same exchange) 2.12***
0.00
1 (new contract, same exchange) 2.55***
0.00
1 (old contract, different exchange) 0.82
0.38
1 (new contract, different exchange) 1.72***
0.00
Log likelihood -844 -835 -849 -843
47

Panel C: Wars
(1) (2) (3) (4)
1 (if ending month experienced WWI or WWII) 1.59**
0.05
1 (if last 6 month experienced WWI or WWII) 1.63**
0.04
1 (if last 12 month experienced WWI or WWII) 1.57**
0.04
1 (if last 24 month experienced WWI or WWII) 1.37
0.20
Log likelihood -831 -788 -724 -656
Panel D: Macroeconomic Events

(1) (2) (3) (4) (5)
1 (if ending month is in recession) 0.91
0.57
1 (if last 12 months was in recession) 0.77
0.12
1 (if last 24 months was in recession) 0.88
0.47
1 (if last 12 months was in a banking crisis, US&UK) 0.70
0.12
1 (if last 24 months was in a banking crisis, US&UK) 0.80
0.28
Log likelihood -849 -788 -656 -724 -656
Panel E: Multiple Drivers

(1) (2) (3) (4)
1(RP > EW Index) 0.69** 0.68** 0.69**
0.03 0.02 0.02
1 (if last 12 month return in the bottom decile) 1.37* 1.34 1.36*
0.10 0.12 0.10
1 (old contract, same exchange) 2.44*** 2.39*** 2.38***
0.00 0.00 0.00
1 (new contract, same exchange) 2.41*** 2.28*** 2.31***
0.00 0.00 0.00
1 (old contract, different exchange) 0.91 1.01 0.92
0.76 0.99 0.79
1 (new contract, different exchange) 1.24 1.28 1.26
0.38 0.31 0.35
1 (if last 12 month experienced WWI or WWII) 1.32 1.44 1.35
0.24 0.12 0.20
1 (if last 12 months was in recession) 0.75 0.75 0.77
0.15 0.14 0.13
1 (if last 12 months was in a banking crisis, US&UK) 0.78 0.76 0.79
0.28 0.24 0.31
Log likelihood -691 -704 -704 -688
48

Table 5: Multi-period returns of commodities and stocks
This table presents summary statistics for multi-period returns of individual commodity contract and stock returns.
Annual and decade returns of individual commodities are calculated using all overlapping 12-month and 10-year
periods. Summary statistics are then calculated for these distributions. “SD” denotes standard deviation. “% > T-Bill”
denotes the fraction of cumulative returns larger than the matched one-month Treasury Bill returns. Return
distributions of stocks are from Bessembinder (2018).
Annual Horizon
Mean Median SD Skew % > T-Bill
Comm 0.110 0.046 0.393 2.691 51.9%
Stocks 0.147 0.052 0.819 19.848 51.6%
Decade Horizon
Comm 1.786 0.675 3.832 5.661 56.9%
Stocks 1.068 0.161 4.416 16.320 49.5%
Lifetime Horizon
Comm 311.500 0.919 1608.290 6.845 58.7%
Stocks 187.471 -0.023 15376.460 154.815 42.6%
49

Figure 1: A timeline of commodity futures
The figure illustrates the chronological evolution of the commodity futures market, organized by the first available dates of contracts in our sample. Each entry
is listed as a combination of city and contract name, with the initial year that data become available shown in parentheses. The timeline for each entry is
populated at the annual frequency, i.e., a gap in the timeline appears only if there are no data available for a full calendar year.
Panel A: Commodities that started trading prior to 1900
50

Panel B: Commodities that started trading 1900-1930
51

Panel C: Commodities that started trading 1930-1960
52

Panel D: Commodities that started trading 1960-1990
53

Panel E: Commodities that started trading after 1990
54

Figure 2: Number of unique commodities over time
The figure plots the number of sample commodities for three levels of aggregation. Level 1 counts all available
commodity contracts separately. Level 2 combines commodities by location, i.e., different grades of coffee contracts
traded in New York are counted as one. Level 3 aggregates across location and commodities, i.e., different grades of
coffee traded in all locations are counted as one commodity.
55

Figure 3: Survival function and hazard function
Panel A shows the Kaplan-Meier survival function estimated using the 230 commodity futures contracts in our
sample between 1871 and 2022. The probability that a contract survives longer than 𝜏 months is given by
𝑑𝜏𝑘
𝑆̂(𝜏) = ∏(1 − )
𝑛𝜏 𝑘
𝜏𝑘 ≤𝜏
where 𝜏𝑘 is a time with at least one failure event, 𝑑𝜏𝑘 is the number of failures at 𝜏𝑘 , and 𝑛𝜏𝑘 is the number of
contracts that have survived up to 𝜏𝑘 . The 95% confidence interval is shown as dashed lines. Panel B plots the
cumulative hazard function and the 95% confidence interval.
Panel A: Kaplan-Meier survival function
56

Panel B: Cumulative hazard function
57

Figure 4: Survival times and risk premiums
This figure plots the average monthly excess returns against the survival time for all 230 commodity futures in our
sample. Currently surviving contracts (as of March 2022) are shown in red, whereas non-surviving contracts are
shown in blue. Panel A includes all commodities. Panel B only includes commodities whose average excess returns
are statistically significant at a 5% level.
Panel A
Panel B
58

Figure 5: Empirical distributions of buy-and-hold returns for individual commodities and stocks
The figure illustrates the empirical densities of buy-and-hold returns for commodities over different holding periods.
The sample for commodities is from 1871 to 2022 and the sample for stocks is from 1926 to 2016 following
Bessembinder (2018). Panels A, B, and C correspond to total returns over one year, 10 years, and over the contract
lifetime. Returns are rounded to 0.02 in Panel A and 0.05 in Panels B and C.
Panel A
59

Panel B
Panel C
60

Appendix Table A1: Risk premium by commodity
For each commodity futures contract, we list the front month average excess returns, geometric average excess returns, and the number of observations. For
commodities with at least 12 months of observations, we also report standard deviation.
Monthly Returns Monthly Returns

Average Geometric Average Standard Deviation # Obs Average Geometric Average Standard Deviation # Obs
New York Cocoa 0.43% 0.03% 8.98% 1126 New York World Sugar No. 8 0.34% -0.62% 14.29% 117
London Cocoa 0.15% -0.16% 7.99% 422 New York Sugar No. 9 5.48% 4.82% 11
New York Cotton 0.46% 0.19% 7.48% 1784 New York Domestic Sugar No. 10 1.63% 1.30% 8.55% 85
Liverpool Cotton 0.77% 0.53% 7.04% 904 New York Sugar No. 11 0.03% -0.77% 12.68% 734
New Orleans Cotton 0.66% 0.39% 7.38% 963 ICE White Sugar 0.88% 0.67% 6.46% 383
Alexandria Cotton 0.41% -0.03% 9.42% 635 Chicago Lumber 0.16% -0.34% 10.18% 629
Liverpool Egyptian Cotton 1.77% 1.20% 10.93% 309 ICE Orange Juice 0.42% 0.00% 9.42% 661
Egypt Cotton 0.50% 0.20% 7.71% 124 Chicago Eggs -0.57% -0.95% 8.64% 619
Egypt Cotton - Sakellaridis 1.73% 1.18% 10.61% 61 Chicago Eggs - Packed 1.92% 1.82% 4.71% 18
Alexandria Cotton - Ashmount -0.14% -0.68% 10.30% 273 Chicago Eggs - Fresh 2.06% 1.74% 8.50% 37
Egypt Cotton - Ash -1.35% -1.62% 7.44% 47 Chicago Eggs - Frozen 0.73% 0.62% 4.66% 126
Chicago Cotton 0.42% 0.22% 6.41% 381 New York Hides -0.17% -0.63% 9.75% 421
Liverpool Cotton- Egypt/Sudan -0.41% -0.71% 7.84% 144 New York Lard 0.64% 0.52% 5.00% 25
Liverpool Cotton- Empire & Middling 0.17% -0.18% 8.59% 129 Chicago Lard 0.03% -0.26% 7.70% 1020
Liverpool Cotton-American Universal 1.36% 1.04% 8.24% 44 Chicago Lard-Loose -1.43% -1.60% 6.09% 20
Bombay Cotton- Bengal 4.22% 4.09% 10 Chicago Lard-Drums -2.21% -2.42% 6.50% 53
Bombay Cotton- Oomra 2.00% 1.90% 11 New York Wool Tops 0.77% 0.61% 5.77% 411
Bombay Cotton- Broach 2.45% 2.36% 10 New York Grease Wool 0.31% 0.12% 6.39% 410
Bombay Cotton 0.97% 0.47% 10.55% 40 Chicago Cheese 0.50% 0.43% 3.97% 141
Liverpool Cotton-American Mixed -0.14% -0.17% 2.67% 70 Chicago Dry Whey 1.06% 0.93% 5.03% 180
New York- Burlap 0.21% 0.17% 2.95% 73 Chicago Milk Class III 0.46% 0.38% 4.02% 313
New York-Tobacco Bright -1.58% -1.80% 6.65% 21 Chicago Butter 0.49% 0.29% 6.46% 263
New York- Tobacco Burley -0.63% -0.86% 7.13% 13 Chicago Butter AA 0.56% 0.14% 9.40% 169
New York- Onions -7.89% -8.78% 9 Chicago Butter – Cash Settled -0.35% -0.51% 5.68% 196
Chicago Onions -1.47% -3.65% 21.37% 187 New York Butter -0.30% -0.49% 6.16% 18
New York Rubber 0.70% 0.23% 10.16% 413 Chicago Frozen Shrimp (15-20 per lb) -0.72% -0.79% 3.64% 16
New York Rubber-A -4.69% -5.38% 12.13% 32 Chicago Frozen Shrimp (31-35 per lb) 2.92% 2.78% 5
New York Rubber-AB 2.17% 1.04% 6 Chicago Hen Turkey -0.72% -0.73% 1.97% 32
New York Rubber- No. 1 B Standard 4.11% 2.99% 11 Chicago Tom Turkey -0.48% -0.54% 3.28% 59
Singapore Rubber 0.98% 0.58% 9.40% 218 Chicago Turkey - Eviscerated -5.84% -6.81% 2
New York Potatoes -0.25% -0.90% 11.43% 460 Chicago Canner Turkey 1.03% 1.03% 3
New York Potatoes – Long Island -2.86% -3.04% 5 Chicago Shoulders-Loose 2.27% 1.90% 8.63% 33
New York Black Pepper 2.38% 1.73% 12.30% 156 Chicago Shoulders-Boxed 0.55% -0.20% 12.59% 43
New York Silk 0.33% -0.02% 8.55% 185 New York Fish Meal -2.50% -2.59% 10
New York Silk – No 2 3.82% 3.22% 11.14% 24 Chicago Frozen Skinned Hams 1.54% 1.46% 4.05% 24
Chicago Plywood 0.21% -0.08% 7.75% 175 New York Tallow -0.86% -1.29% 9.75% 58
New York Coffee - A 0.29% -0.06% 8.32% 721 Chicago Meats - Boxed 2.97% 2.61% 8.89% 34
New York Coffee - D 1.06% 0.77% 7.65% 225 Chicago Short Ribs 0.84% 0.47% 8.65% 654
New York Coffee – F -0.11% -0.25% 5 Chicago Choice Steers Carcasses 0.13% 0.10% 2.49% 17
New York Coffee - S 2.53% 2.25% 7.76% 87 Chicago Choice Steers 1.16% 1.11% 3.26% 44
New York Coffee - U 1.37% 1.24% 5.37% 17 Chicago Broiler Frozen 0.06% 0.04% 9
New York Coffee - B 0.87% 0.81% 3.44% 147 Chicago Broiler Iced 0.29% 0.07% 6.89% 138
New York Coffee - M 1.27% 1.18% 4.28% 95 Chicago Broiler Fresh -2.78% -2.90% 4.87% 33
New York Coffee - R -0.01% -0.24% 6.99% 36 Chicago Drysalted Clear Bellies 1.27% 0.76% 10.31% 194
New York Coffee - W 1.23% 1.21% 8 Pork Bellies 0.29% -0.24% 10.31% 595
Havre- Coffee -0.16% -0.40% 7.00% 26 Feeder Cattle 0.17% 0.06% 4.84% 604
New York Coffee - C 0.53% 0.00% 10.62% 595 Live Cattle 0.65% 0.52% 5.05% 688
ICE Robusta Coffee 0.83% 0.23% 11.43% 213 Lean Hogs 0.49% 0.16% 8.12% 673
ICE Robusta Coffee 10 tonne 0.07% -0.22% 7.65% 163 Chicago Mess Pork 0.62% 0.18% 9.60% 613
New York Raw Sugar No. 1 0.19% -0.57% 12.53% 216 Winnipeg Wheat 0.92% 0.66% 7.31% 669
New York Raw Sugar No. 2 -4.13% -4.15% 5 Duluth Wheat 0.71% 0.41% 7.85% 687
New York Refined Sugar 1.24% 0.94% 8.05% 28 Baltimore Wheat -0.44% -0.64% 6.29% 218
New York Domestic Sugar No. 3 0.45% 0.24% 6.44% 84 Buenos Aires Wheat -2.52% -3.16% 11.05% 63
New York Raw Sugar No. 4 0.48% 0.05% 9.56% 214 Buffalo Wheat 0.98% 0.98% 2
New York Domestic Sugar No. 5 0.21% 0.16% 3.20% 41 Cincinnati Wheat -2.71% -2.73% 7
New York Domestic Sugar No. 6 0.15% 0.13% 2.17% 138 Detroit Wheat Red -0.85% -0.99% 5.48% 36
New York Domestic Sugar No. 7 0.41% 0.19% 6.74% 83 Detroit Wheat White -0.76% -0.93% 5.93% 88
61

Appendix Table A1: Risk premium by commodity (continued)
Monthly Returns Monthly Returns
Average Geometric Average Standard Deviation # Obs Average Geometric Average Standard Deviation # Obs
Rotterdam Wheat -7.77% -8.10% 8.12% 14 Cincinnati Oats 7.47% 7.47% 1
San Francisco Wheat 1.07% 0.87% 6.33% 89 Toledo Oats -1.16% -1.35% 6.04% 39
Philadelphia Wheat -0.49% -0.62% 5.24% 163 Kansas City Oats -0.55% -1.09% 10.54% 74
New York Wheat 0.12% -0.06% 5.99% 482 Chicago Oats 0.34% -0.05% 9.03% 1797
Liverpool Wheat Pound 0.13% -0.05% 6.03% 294 Memphis Cottonseed Meal 0.10% -0.07% 5.81% 85
Liverpool Wheat Dollar 0.06% -0.28% 8.45% 211 New York Soybean Oil 1.16% 0.77% 9.17% 170
European Wheat 0.84% 0.63% 6.54% 278 Chicago Soybean Oil 0.67% 0.33% 8.48% 860
Kansas City Wheat 0.42% 0.16% 7.28% 1444 Memphis Soybean Meal 1.36% 1.09% 7.43% 154
Kansas City Wheat No 3 -12.17% -12.17% 1 Chicago Soybean Meal 0.90% 0.55% 8.75% 846
Chicago Wheat 0.20% -0.09% 7.67% 1769 Chicago Soybean 0.70% 0.40% 7.97% 972
Minneapolis Wheat (No. 1 Northern) 0.53% 0.28% 7.16% 1595 Chicago Rice-Rough -0.37% -0.69% 8.05% 426
Minneapolis No.1 Hard Wheat 0.59% 0.39% 6.59% 54 Winnipeg Canola 0.67% 0.30% 9.88% 596
Minneapolis No. 2 Northern Wheat 0.61% 0.30% 8.22% 52 European Rapeseed 0.64% 0.42% 6.19% 327
Milwaukee Wheat 0.47% 0.18% 8.00% 307 Crude Palm Oil 1.42% 1.06% 8.65% 242
St. Louis Wheat 0.26% -0.05% 7.97% 661 New York Gasoline - A -2.02% -2.37% 8
St. Louis Wheat No 3 -1.23% -1.93% 12.76% 15 New York Gasoline - B 1.50% 1.25% 11
Toledo Wheat (No. 2 Red) 0.20% -0.04% 7.16% 433 New York Gasoline 2.16% 1.52% 11.73% 264
New York Corn 1.17% 0.90% 7.71% 356 New York RBOB 1.38% 0.67% 11.14% 197
Chicago Corn 0.22% -0.07% 7.71% 1795 New York Propane 1.94% 1.07% 14.33% 264
St. Louis Corn 0.86% 0.53% 8.18% 573 New York Crude Oil 1 -1.68% -1.71% 5
Kansas City Corn 1.60% 1.19% 9.28% 560 New York WTI Crude 0.78% 0.25% 10.29% 468
Philadelphia Corn 1.02% 0.73% 7.82% 153 ICE Brent Crude 1.12% 0.62% 9.89% 392
Baltimore Corm -0.07% -0.41% 7.87% 183 New York Natural Gas -0.54% -1.47% 13.85% 383
Boston Corn -4.01% -4.12% 4 ICE UK Natural Gas -1.11% -2.10% 14.64% 301
Buffalo Corn -7.14% -7.14% 1 Kansas City Western Natural Gas -2.83% -3.07% 4
Duluth Corn -3.06% -3.13% 3 New York Heating Oil 1.25% 0.74% 10.30% 520
Milwaukee Corn 1.54% 1.36% 6.17% 154 ICE Gasoil 1.06% 0.58% 9.88% 439
Minneapolis Corn 0.36% 0.20% 5.71% 62 Chicago Ethanol 2.98% 2.43% 10.86% 196
Toledo Corn 0.06% -0.42% 9.61% 138 New York Ethanol 2.20% 1.92% 7.62% 176
New York Cottonseed Oil 0.28% -0.02% 7.83% 724 New York Gold 0.17% 0.03% 5.38% 567
New York Cottonseed Oil - Prime Summer Yellow -6.49% -7.28% 12.62% 13 Chicago Gold -1.53% -1.86% 8.20% 62
Toledo Cloverseed 2.22% 1.82% 9.01% 355 New York Silver 0.37% -0.04% 9.20% 705
Chicago Cloverseed 0.03% -0.31% 7 New York Silver – Pre War 2.84% 2.59% 7.65% 20
Chicago Flaxseed 0.69% 0.48% 6.66% 216 Chicago Silver (5000 troy oz) 0.86% -0.20% 14.76% 100
Winnipeg Flaxseed 0.32% 0.04% 7.62% 872 Chicago Silver (1000 troy oz) -0.70% -1.01% 7.98% 174
Duluth Flaxseed 0.75% 0.48% 7.50% 488 Montréal Silver -0.77% -0.99% 6.68% 38
Minneapolis Flaxseed -0.03% -0.18% 5.44% 464 London Silver 0.50% 0.20% 7.95% 539
Buenos Ares Flaxseed 0.48% 0.10% 9.04% 33 London Silver (OTC) 0.06% -0.05% 4.86% 192
Chicago Rye -0.05% -0.41% 8.52% 724 New York Platinum 0.42% 0.13% 7.68% 709
Minneapolis Rye 0.26% -0.20% 9.75% 445 New York Palladium 0.78% 0.27% 10.06% 592
Winnipeg Rye 0.41% -0.02% 9.40% 777 New York Mercury -0.06% -0.14% 4.23% 36
Duluth Rye -0.83% -1.38% 10.69% 138 London Aluminum 0.12% -0.08% 6.50% 417
Winnipeg Barley 0.50% 0.25% 7.18% 889 New York Copper 0.73% 0.45% 7.55% 1145
Chicago Barley 1.68% 1.08% 11.40% 150 London Copper 0.78% 0.52% 7.14% 296
Milwaukee Barley 1.76% 0.70% 16.41% 18 London Copper (Pounds) 0.36% 0.11% 7.14% 1217
Chicago Timothy Seed -1.21% -1.37% 5.68% 22 London Copper Refined 3.58% 3.16% 9.27% 34
Toledo Timothy Seed -0.01% -0.65% 10.88% 86 New York Tin 0.48% 0.32% 5.65% 448
Kansas City Sorghums -0.32% -0.39% 3.94% 34 New York Tin-Standard 0.76% 0.60% 5.74% 67
Winnipeg Linseed Oil -0.67% -1.19% 10.14% 21 London Tin 0.61% 0.40% 6.51% 392
Toledo Alsike 2.25% 2.04% 6.63% 86 London Tin (pound) 0.58% 0.42% 5.66% 1208
New York Oats -1.63% -2.03% 9.22% 40 New York Zinc 0.60% 0.38% 6.83% 414
Winnipeg Oats 0.92% 0.65% 7.58% 814 Lindon Zinc 0.43% 0.18% 7.08% 542
Philadelphia Oats 0.79% 0.55% 6.84% 94 London Zinc (pound) 0.40% 0.13% 7.43% 697
St. Louis Oats 1.00% 0.59% 9.21% 492 New York Lead 0.99% 0.63% 8.42% 60
Minneapolis Oats 0.44% 0.01% 9.80% 537 London Lead pound 0.37% 0.11% 7.34% 771
Milwaukee Oats 1.49% 1.08% 9.17% 75 London Lead 0.35% 0.08% 7.46% 541
Boston Oats 0.85% 0.76% 7 London Nickel 0.86% 0.38% 10.36% 515
London Pig Iron 0.28% 0.14% 5.39% 167
62

Appendix Table A2: Extreme returns and survival
This table presents estimated hazard ratios based on the Cox proportional hazards regressions:
risk of failure across contracts. Each month, all available contracts are ranked based on their past 6, 12, or 24-month
returns. The indicator variables are turned on depending on whether a contract is in the bottom 10% of the cross-
sectional distribution. The hazard ratio is the exponentiation of the estimated coefficient. P-values are shown below
the hazard ratios, and statistically significant values at a 5% level are shown in bold.
Months 0-36 Months 0-48 Months 0-60

(1) (2) (3) (4) (5) (6) (7) (8) (9)
1 (if last 6 month return in the bottom decile) 2.45 2.00 2.15
0.03 0.08 0.03
0.02 0.02 0.01
0.00 0.04 0.01
Log likelihood -172 -107 -43 -204 -138 -75 -245 -179 -115
63

Appendix Figure A1: Futures timelines by sector
The figure shows the chronological evolution of the commodity futures market, organized by sectors. Each entry is listed as a combination of city and contract
name, with the initial year that data become available shown in parentheses. The timeline for each entry is populated at the annual frequency, i.e., a gap in the
timeline appears only if there are no data available for a full calendar year.
Panel A: Softs
64

Panel B: Livestock
65

Panel C: Grains and oil seeds
66

Panel D: Energy
67

Panel E: Precious metals
68

Panel F: Industrial metals
69

Appendix Figure A2: Average premiums across deciles by lifetime
We sort contracts by the length of their observed (censored) lifetime into deciles; the first decile contains the shortest-lived contracts those lifetimes span one
to 10 months, and the tenth decile contains the longest-lived contracts with lifetimes exceeding 722 months. An average risk premium is calculated for each
decile by taking a simple average all monthly observations (multiplied by 12 to annualize), treating each monthly excess return as a separate observation of the
risk premium. 95% confidence intervals are shown around the mean estimates.
70

Appendix Figure A3: Number of commodities over time
The figure plots the number of sample commodities in our sample compared to that of Levine et al. (2018). Level 1 counts all available commodity contracts
separately. Level 3 aggregates across location and commodities, i.e., different grades of coffee traded in all locations are counted as one commodity. The number
of commodities from Levine et al. (2018) is constructed using the start and end dates included in the NBER working paper.
71

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The Flipside of Financial Innovation: Why Contracts Fail*

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2. Background and overview of data

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2.2 Excess return calculation

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3. Empirical estimates of commodity futures risk premiums

3.1 Average commodity futures risk premium

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3.2 Survivorship bias

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4.2 Descriptive statistics of contract survival

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4.2.2 The risk premium across survival time

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4.3 Does the risk premium predict contract survival?

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4.3.1 Hazard model estimates

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4.4 Additional factors influencing survival

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4.4.2 Competition among contracts

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4.4.3 Trading disruptions and macroeconomic events

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5. Distributional properties of commodity futures returns

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Electronic copy available at: https://ssrn.com/abstract=4730746

Panel A: Full Sample Summary Statistics

Panel B: Premiums by Sector

Electronic copy available at: https://ssrn.com/abstract=4730746

Panel A: Risk premium comparisons

Panel B: Contract survival (years)