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This paper shows that economic linkages among commodities create a source of long-term correlation between futures returns. We extend the theory of storage to a multi-commodity level and find that the convenience yield of a commodity depends on its relative scarcity with respect to other related commodities. This implies a feedback effect between commodities that is necessary to replicate the upward-sloping correlation term structure of futures returns observed for related commodities. We present a multi-commodity affine model that validates our theoretical predictions and considerably reduces the pricing errors in out-of-sample crack spread options.


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© Oxford University Press. Final version published as: Casassus, J., Liu, P., & Tang, K. (2013). Economic linkages, relative scarcity, and commodity futures returns. Review of Financial Studies, 26(5), 1324-1362. doi:10.1093/rfs/hhs127
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