Prices of Risk Estimation for Commodity Factors

ABSTRACT This study investigates the prices of risk in cross‐sectional commodity futures portfolios using a three‐pass regression approach that is robust to model specification. We find that the prices of risk for commodity basis and value factors are important, with values of 1.2% and 2.0% per month, respectively. Moreover, we observe that the commodity factors do not price cross‐sectional equity portfolios, resulting in a combination of the equity market and commodity factor portfolios achieving a high Sharpe ratio. Additionally, we demonstrate that the equity market factor has recently become more strongly associated with the cross‐sectional commodity futures portfolios, suggesting the effects of financialization.