Long-Run Risks and Commodity Investment
Thursday, November 29, 2012 – ( 4:00 pm to 5:00 pm )
Location: Babbio 310
Howe School Seminar
Ph.D. Engineering Systems Division (ESD),
Massachusetts Institute of Technology
Investment in commodities has become a popular strategy for institutional investors. This talk focuses on theoretical frameworks for exploring the returns of both commodity contracts and commodity firms' equity, under the framework of long-run risks (a la Bansal and Yaron (2004)). I introduce a two-sector general equilibrium model of the economy, which also includes a commodity storage technology, where shocks to aggregate productivity affect prices as well as the storage decisions of the commodity sector. By demonstrating a relationship between the expected growth rates of aggregate consumption and the term structure of commodity spot prices, I propose a new explanation for the observed excess volatility and excess returns of commodity futures. To elaborate the differences between returns to investment in commodity and non-commodity sectors, I note the fact that the total endowment of exhaustible resources is constant, and that the commodity sector is not subject to technology displacement risks. My model implies that the equity of resource firms should have a high loading on long-run risk factors. I provide empirical evidence supporting the theoretical arguments.
Dr. Hamed Ghoddusi is a Postdoctoral Associate of the Engineering Systems Division (ESD), Massachusetts Institute of Technology (MIT). He has received his PhD in Finance from the Vienna Graduate School of Finance (VGSF) and has been a visiting PhD student of UT Austin and UC Berkeley. He has also been affiliated with Oxford Energy Institute, International Institute for Applied Systems Analysis (IIASA), UNDP, and UNIDO, as a visiting researcher or consultant. His research interests include Macro/Finance, Asset Pricing, Risk Management, and Energy and Environmental Finance and Policy.