Macroeconomic factors and the cross-section of commodity futures returns

This study investigates whether macroeconomic factors can explain the cross-section of commodity futures returns. Based on the intertemporal capital asset pricing model, the theory of storage, and in an open economy framework, we derive a four-factor asset pricing model. Our investigation of 14 components of the Standard & Poor's Goldman Sachs Commodity Index from various sectors shows that long-only investors holding commodity futures contracts are compensated for taking on the unexpected real exchange rate risk. The result is robust for various estimation methods and various definitions of the factors. Our result is consistent with the argument that the exchange rate reflects information about future movements in the commodity markets.