NEW EVIDENCE ON AGRICULTURAL COMMODITY RETURN PERFORMANCE UNDER TIME-VARYING RISK

Holding commodity stocks is a major investment that commodity producer s, merchants, and processors must continually manage. In this paper we study the conditional risk and return characteristics of commodities. We use a generalized method of moments estimator in a model of condit ional expected returns under a single-hera asset pricing theory framew ork, allowing both the risk premium and the beta to vary with time, We find that expected returns to commodities are lower during times nf h igh interest rates, expected inflation, and economic growth. This sugg ests that commodities provide a natural hedge against business cycles.