Structural and Transitory Changes in the Commodity Futures Risk Premium

Advisor: Marcelo Medeiros

Co-advisor: Ruy Monteiro Ribeiro

Commodity index investing (CII) became a major trend among portfolio managers by the early 2000s causing a large influx of non-commercial investors to the commodity futures market. By improving the integration of commodity futures market to the broad financial market, CII is expected to have affected the risk premium in commodity futures. A new methodology is proposed to investigate both structural and transitory changes of risk premium behavior in the term structure of crude oil futures. The methodology consists of introducing Markov switching to the framework of affine term structure models while avoiding over-parametrization and unrealistic regime-switching in the cross-section relations of the term structure. Overall, results are in agreement with the previous literature by indicating the existence of a structural break coinciding with the popularization of CII followed by a period of lower and more volatile risk premium.