Risk premia in Chinese commodity markets

This paper investigates risk premia in Chinese commodity markets by decomposing the returns of commodity futures into spot and term premia following Szymanowska et al. (2014). We find that a three-factor model that includes an equally-weighted market factor, carry and time-series momentum explains spot premia. The term premium, which represents a deviation from the expectation hypothesis, is weak. By contrast, the premium in the U.S. commodity market is significant, evidence by an average t-statistic of 4.32. This premium is explained by two investable factors that are derived using calendar spreads. We further demonstrate that the term premia are not driven by liquidity and are negatively related to basis, likely due to mean-reversion in basis.