The predictability of aggregate returns on commodity futures

This paper provides evidence that aggregate returns on commodity futures (without the returns on collateral) are predictable, both in‐sample and out‐of‐sample, by various lagged variables from the stock market, bond market, macroeconomics, and the commodity market. Out of the 32 candidate predictors we consider, we find that investor sentiment is the best in‐sample predictor of short‐horizon returns, whereas the level and slope of the yield curve have much in‐sample predictive power for long‐horizon returns. We find that it is possible to forecast aggregate returns on commodity futures out‐of‐sample through several combination forecasts (the out‐of‐sample return forecasting R2 is up to 1.65% at the monthly frequency).