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Working papers

Subjective Risk Premia and Intermediary Asset Pricing: Evidence From Commodity Markets. 

 (Job Market Paper); March 2024.

Abstract: I investigate the impact of financial intermediaries and shifts in market participation among different intermediary types on the dynamics of subjective risk premia. I measure subjective risk premia using return expectations of professional forecasters for commodities, a sophisticated asset class. Commodities provide an ideal setting as they allow to explore the unprecedented increase in institutional investor participation, beyond primary dealers, that occurred during the "financialization" of commodity markets. I show that the financial health of intermediaries, particularly primary dealers, plays a crucial role in driving subjective risk premia. However, with the change in the mix of market participants, the importance of primary dealers for subjective return expectations diminishes, while that of non-primary dealers increases. These findings reveal intermediaries as a novel source of variation in subjective risk premia, emphasize the significance of intermediary heterogeneity in shaping asset prices and highlight the time-varying nature of this relationship.


Commodity Returns: Lost in Financialization.

with Fahiz Baba-Yara (Indiana University); June 2023.

Abstract: The flow of institutional investors and index capital into the commodity futures market dramatically increased around 2004. This event is referred to as the financialization of commodity markets. We study how this growth in investment capital has affected average returns in the asset class by examining how average returns to popular commodity futures trading strategies have evolved over time. We find that about 80% of commodity futures strategies that earned statistically significant average returns pre-financialization are no more profitable afterward. We show that this decline in strategy returns can be wholly explained by an adverse change in the average returns to a handful of systematically priced factors in the cross-section of commodity futures. This result suggests that the decline in strategy returns cannot be attributed to the disappearance of mispricing. We further show that commodity strategies that have relatively higher exposure to the Dow Jones Commodity Index experience a significant decline in average returns. In robustness tests, we show that the publication of commodity strategies in the academic literature can only explain about 25% of the reduction in commodity futures strategy returns.

*Indicates presentation by coauthor.

Work in progress

The Price of Macro-financial Risk Factors in the Cross-Section of Commodity Returns.

with Fahiz Baba-Yara (Indiana University) and Robert Hill (Bank of Canada).

[Draft coming soon].

Abstract: This paper examines the macroeconomic and financial determinants of risk that contribute to the risk-return tradeoff in a large cross-section of commodity futures returns. We estimate the risk-premia associated with a broad set of observable macro-financial risk factors that are robust to omitted variable bias, measurement error, and weak factor problems. To accomplish this, we combine the recent approach to construct high-dimensional optimal portfolios of test assets, proposed by Bryzgalova et al. (2021), with the new three-step asset pricing procedure of Giglio et al. (2021) (so-called "Supervised-PCA") that estimates the price of risk of the candidate risk factors. Our findings reveal that only a small fraction of macro-financial factors are priced. Specifically, a global financial cycle factor and, secondarily, a global economic conditions factor are the main macro-financial sources of risk in the commodity futures market. Additionally, we observe that forex, stock and inflation risks are weak risk factors in commodity markets. In contrast to recent evidence in other asset classes, factors related to volatility, uncertainty, liquidity conditions and other macroeconomic shocks do not appear to carry significant risk premia in the context of commodities.

Other papers

(Peer-Reviewed). 

Commodity Tail-Risk and Exchange Rates. 

with Giovanni Rillo (LUISS University); Finance Research Letters^, June 2022. 

^ “Class A” journal according to the 2022 ABDC Journal Quality List and the 2022 Italian Ranking of Economics Journals (ANVUR).

[PhD Publication: Spin-off of the 2nd year PhD summer paper].

Abstract: This paper studies the downside tail-risk relationship between currencies and commodities. In order to do so, we use the novel MCoVaR with Elastic-Net of Bonaccolto et al. (2021) to simultaneously account for the potential ties among a large set of commodities. We show that exchange rates are significantly exposed to downside tail-risk with respect to several commodities, including, but not limited to, oil and gold. Additionally, we find that different exchange rates are vulnerable to tail-risk in different commodities. Lastly, the results with respect to gold indicate that the Japanese yen and the Swiss franc can be considered safe-haven assets.