Volatility Risk Premium in Commodity Markets


We show that returns to value strategies in individual equities, currencies, global stock indexes, global government bonds, and commodities are predictable by the value spread. This fact is at odds with models that exclusively generate a value premium in equities. Common and asset-class-specific components of the value spread contribute equally to this predictability. We argue that common variation in value premia is consistent with rationally time-varying expected returns, most importantly because (i) common value is closely associated with standard proxies for risk premia, such as the dividend yield, intermediary leverage and illiquidity, and (ii) value premia are globally high in bad times. In contrast, expected returns to momentum strategies are largely unrelated to standard proxies for risk premia, and, if anything, low in bad times.