Risk Premia in Commodity Futures Markets – An Out-of-Sample Test

The authors of the comprehensive paper document the properties of the first diversified commodity futures index introduced by the Dow Jones & Company in 1933 and use its live track record to study the properties of the asset class in an experimental setting that does not suffer from backfill, selection, or survivorship biases. Despite the setbacks posed by contract failure and trading suspensions of several index constituents, the index appreciated by 3.7% per year between 1933 and 1998, while an investment in collateralized front-month futures returned 4.5% in excess of the risk-free rate. The authors quantify the impact of trading suspensions and contract failure on estimates of the risk premium.