Commodity-Based Consumption Tracking Portfolios and the Cross-Section of Average Stock Returns

In this paper we study the ability of commodity-based consumption tracking portfolios to explain the cross-section of average stock returns. We construct the tracking portfolios by projecting consumption growth onto a set of commodity futures returns as base assets. Using monthly portfolio and individual stock returns, we find that consumption risk measured against those tracking portfolios is priced with a significant risk premium of 50 to 100bps per annum. This is not the case for consumption tracking portfolios based on stock and bond returns. Our results highlight the importance of commodity markets for the testing of consumption-based asset pricing models.

Marta Szymanowska is affiliated with the Department of Finance of Rotterdam School of Management, Erasmus University and with the ERIM Early Career Talent Program. Her research interests are in empirical asset pricing, financial markets and the real economy, the cross- sectional and time-series predictability of returns, and (commodity) futures markets. She has published her research in Journal of Futures Markets. She has presented her work at international conferences such as the Western Finance Association or the American Finance Association and has been invited for seminar to numerous international research institutes like Said Business School, Oxford University or Center for Financial Studies, Frankfurt.