Commodity return predictability: Evidence from implied variance, skewness, and their risk premia

•We investigate the role of realized and implied moments and their risk premia (variance and skewness) for commodities’ future returns.•Risk premia are computed as the difference between implied and realized moments.•We document from a cross-sectional and time-series perspective, the strong positive relation between commodity returns and implied skewness.•We emphasize the high performance of skewness risk premium. This paper investigates the role of realized and implied moments and their risk premia (variance and skewness) for commodities’ future returns. We estimate these moments from high frequency and commodity futures option data that results in forward-looking measures. Risk premia are computed as the difference between implied and realized moments. We highlight, from a cross-sectional and time-series perspective, the strong positive relationship between commodity returns and implied skewness. Moreover, we emphasize the high performance of skewness risk premium. Additionally, we show that portfolios built by sorting skewness risk premium and implied skewness exhibit the best risk-return tradeoff. Most of our results are robust to other factors such as the momentum and roll yield.