Time-varying risk premia and forecastable returns in futures markets

We document that instrumental variables known to possess forecast power in equity and bond markets (Treasury bill yields, equity dividend yields, and the 'junk' bond premium) also possess forecast power for prices in agricultural, metals, and currency futures markets. The pattern of forecastability in futures is consistent with economic equilibrium as embodied by a two-'latent-variable' model. We test whether the latent variables that explain these futures returns coincide with latent variables that explain returns on size-ranked equity portfolios. This hypothesis is rejected, suggesting that futures are subject to different sources of priced risk than are equities.