Intermediary asset pricing in commodity futures returns

Abstract

This paper assesses the extent to which intermediary capital (IC) risk contributes toward explaining commodity futures returns. We find that the IC effect is substantially positive and continues to grow as the financialization of commodities deepens. Positive and negative IC risks play asymmetric roles, with the effect of negative IC strengthening in recent subperiods. We further confirm the heterogeneous roles of IC across individual commodities by crosssection analyses. Overall, the effect of the positive IC risk factor varies significantly. Portfolios with low basis, low open interest, low momentum, and low liquidity earn significantly higher returns than counterparty portfolios.

Intermediary capital risk and commodity futures volatility

“…This result is in line with the findings of He and Krishnamurthy (2012) and He et al (2017) that the intermediary capital risk factor is strongly procyclical. Moreover, we observe a strengthening of the dependence over the post‐2008 period, which is consistent with the finding of Yin et al (2020) that the impact of intermediary capital risk continues to increase with the financialization of commodity futures markets, especially after the 2008 financial crisis. Yin et al (2020) also document an asymmetric role of the intermediary capital risk.…”

“…Empirical tests have been extensively conducted to study the effects of intermediary risk on price dynamics over time and asset classes (see, e.g., Adrian et al, 2014; Brunnermeier & Sannikov, 2014; Chen et al, 2019; Gabaix et al, 2007; He et al, 2017; Mitchell & Pulvino, 2012). However, the corresponding evidence in commodity futures markets is scant, with a notable exception of Yin et al (2020). Although Yin et al (2020) report empirical evidence of the significant positive effect of intermediary capital shocks on commodity futures returns, the relation between intermediary capital risk and commodity futures volatility remains unclear.…”

“…However, the corresponding evidence in commodity futures markets is scant, with a notable exception of Yin et al (2020). Although Yin et al (2020) report empirical evidence of the significant positive effect of intermediary capital shocks on commodity futures returns, the relation between intermediary capital risk and commodity futures volatility remains unclear.…”

“…For robustness, we draw on six different volatility measures of two typical commodity indexes and nine major commodity futures. We follow He et al (2017) and Yin et al (2020) in measuring the intermediary capital risk factors as innovations to the intermediary capital ratio of primary dealers, which capture the financial shocks that govern the soundness of the financial intermediary sector. We observe an overall negative dependence between commodity futures volatility and intermediary capital risk.…”

The emergence of SARS, MERS and novel SARS-2 coronaviruses in the 21st century

“…In sum, with the efforts of scientists, professionals, and health authorities and the urgency to contain the COVID-19 pandemic, impressive results have been achieved in a short time. Among these results, the following stand out: the determination and availability to the public of several full-genome sequences of SARS-CoV-2 isolates from clinical specimens, and the efforts by the CDC of China and other institutions that are conducting drug screening for viral pneumonia and developing a vaccine for SARS-CoV-2 [73][74][75][76][77]. Another factor that has given rise to hope of preventing, or containment, of the COVID-19 epidemic in China and South Korea concerns the rapid isolation of symptomatic individuals and those suspected of having the disease, including self-isolation of those with mild symptoms, in addition to the constant surveillance of people closest to suspected cases.…”