Depressed Risk Premia or Mispricing; Where Did the Commodity Returns Go After Financialization?


The flow of investment capital into the commodity futures market dramatically increased around 2004, and this event is referred to as the financialization of commodity markets. We study how this phenomenon has affected risk premia in this asset class by examining how returns to popular commodity futures strategies have evolved. We find that about 80% of commodity futures strategies that earned a statistically significant risk premia pre-financialization have earned an average of a zero return since. Using a six latent factor asset pricing model, we show that this deterioration in average returns can be wholly explained by an adverse change in the risk premia to systematically priced variation in the cross-section of commodity futures. In robustness tests, we show that the publication of commodity strategies in the academic literature can only explain about 25% of the 58 bps per month reduction that commodity futures strategies have experienced post-financialization. .