Commodity skewness is a risk factor for excess returns

Skewness matters because it tells us something about the tilt in sentiment and crowd behavior in commodity markets. By looking at the skew for a portfolio of commodity markets and sorting by quantiles of low to high skew based on the rolling prior year of information, it is found that there is significant gains from buying the lowest skew and selling the highest skew. This factor has been measured to be stronger than other well-known commodity risk factors, see "The Skewness of Commodity Futures Returns".  The impact is statistically significant and cannot be explained by other pricing models like the overall commodity market portfolio (equal weighted) momentum, term structure, or hedging pressure.

The argument for holding these negative skewed commodities is that investors prefer lottery tickets and are affected by prospect theory; those commodities that have positive skew which will be overpriced in the marketplace. Those commodities that have negative skew need compensation to hold these skewed assets. There is also a selective hedging story that places longer hedges for positive skew (producers hedge less and consumers hedge more) and shorter hedges for negatively skewed assets (producers hedge more and consumers hedge less). It is found that negative or low (high) skew have more backwardated (contango) characteristics, but the skew effect cannot be explained by other factors.

The positive value (premium) from skew works for both time series and cross-sectional analysis and provides another way to measure risk premia within the commodity markets.