One Hundred Years of Rare Disaster Concerns and Commodity Prices

This paper shows that rare disaster concern, defined as the news-implied volatility, performs very well at predicting the return of index commodity futures throughout the whole nearly century period of 1926 to 2016. This result holds after controlling for the current business cycle conditions, the macroeconomic variables, and the Volatility Index (VIX). The paper finds that rare disaster concern performs very well at predicting index commodity futures returns out-of-sample. The results remain robust while considering different macroeconomic conditions such as recession (expansion), contango (backwardation), or increased (decreased) inflation.