Intermediary asset pricing in commodity futures returns

This paper assesses the extent to which intermediary capital (IC) risk contributes toward explaining commodity futures returns. We find that the IC effect is substantially positive and continues to grow as the financialization of commodities deepens. Positive and negative IC risks play asymmetric roles, with the effect of negative IC strengthening in recent subperiods. We further confirm the heterogeneous roles of IC across individual commodities by cross-section analyses. Overall, the effect of the positive IC risk factor varies significantly. Portfolios with low basis, low open interest, low momentum, and low liquidity earn significantly higher returns than counterparty portfolios.