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Co-author and Opalesque reader Mack Frankfurter has provided this new research which investigates potential sources of return to speculators in the commodity futures market.

Initially, we focus on the “classic arbitrage model” based on the theories of Keynes (1930), Kaldor (1939), Hicks (1939, 1946), Working (1948) and Brennan (1958). Next our study examines the “simplified arbitrage model” which references the term structure of the futures price curve and provides rationale for a structural risk premium known as the roll return. We then introduce our theory of “roll yield permutations” which is derived from integrating the futures price curve with the expected future spot price variable. Last, we investigate Spurgin’s (2000) “hedging response model” from which asymmetric hedging response functions transfer risk premia to speculators.

Our research indicates that these models have inherent shortcomings in being able to pinpoint a definitive source of structural risk premium within the complexity of the commodity futures markets. We hypothesize that the classic arbitrage pricing theory contains circular logic, and as a consequence, its natural state is disequilibrium, not equilibrium. We extend this hypothesis to suggest that the term structure of the futures price curve, while indicative of a potential roll return benefit, in fact implies a complex series of roll yield permutations. Similarly, the hedging respon......................

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