How Is Convenience Yield Risk Priced?
This paper investigates how convenience yield risk is priced in commodity markets.
This is the first study to examine convenience yield risk premiums in various commodity markets directly in detail.
According to the two-factor and three-factor models, we construct a portfolio that is only sensitive to convenience yield risk.
Then, we study the relationship between the convenience yield risk premiums and other risk factors.
Design / Methodology
We construct a portfolio that is only sensitive to convenience yield risk to extract the convenience yield risk premiums.
Then, we perform a least square regression to explain the determinants of the premiums.
Convenience yield risk premiums are positive.
Risk premiums are very large for metals and grains.
There are no significant convenience yield risk premiums for oil and gas.
Variations in the convenience yield risk premium across different commodities are related to the market structure.
Research Limitations / Implications
The research heavily depends on the reliability of two-factor and three-factor models.
A positive convenience yield risk premium suggests that commodities’ holders are compensated of bearing the risk of lower convenience yield.
Practical / Social Implications and Relevance to the Industry
A robust and direct approach for extracting the convenience yield risk premiums.
- commodity markets
- convenience yield
- risk premium
- factor model
Thesis title: How Is Convenience Yield Risk Priced?
Department: Applied Finance and Actuarial Studies
Expected date of completion: 03/09/2013
Principal supervisor: Professor Stefan Trueck
Associate supervisor: Dr Nino Kordzakhia