Abstract - Consumption Risk and Expected Futures Returns

We study whether futures markets are subject to the same sources of priced risk as stock markets. We find that, similar to stock returns, the conditional Consumption CAPM explains up to 60% of the cross-sectional variation in mean futures returns. However, unlike for stock returns, the use of ultimate (i.e., contemporaneous plus future) consumption growth reduces the performance of the model. We attribute this to the fact that for commodities supply changes impact prices and therefore consumption, which induces state-dependent utility and leads to a two factor consumption model. This model explains about 80% of the cross-sectional variation in mean futures returns, which further increases when an ultimate risk measure is used. We find that this additional preference risk can be hedged by futures but not by stocks, which may explain why ultimate risk is not as good a risk measure for commodities as for stocks. Hence, our results contribute to the debate on the integration of futures and stock markets.

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