very very awesome paper on commodity futures returns...

[DcifrThs]

this paper has enlightened me.

commodity futures returns historically linked to "backwardation" or "roll yield" seem to be simply proxies for inventory indicators from the theory of storage.

namely, the basis (difference between spot price and next nearby futures price), when large and positive is indicative of a steeply backwarded futures curve. when it is negative, the curve is in contango.

low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).

this is just some fo the great insights from this paper:

Fundamentals of commodity futures returns

enjoy!

Barron