The roll yield is the difference between the profit or loss of a futures contract and the change in the spot price of the underlying asset of that futures contract. Unlike fixed income or dividendyields, a roll yield does not provide a cash payment, and may not be counted as a profit in certain cases if it accounts for the underlying asset's cost-of-carry. Nonetheless, the roll yield is often characterized as a return that a futures investor capture in addition to the price change of the underlying asset of a futures contract.
Characterization as a gain or a loss
Roll yield is often characterized as an extra gain or loss that a futures investor captures in addition to the change in the spot price of the underlying asset. However, this is only the case in the case of less-than-perfectly efficient markets when the roll yield is greater than the cost-of-carry. For example, suppose the spot price of oil is $58 and the market is inverted because inventories are relatively low. This means the first futures price might be at $59 and the next contract at $60. Investors can go long the front contract as described above. Suppose that the spot price remains constant, the futures contract you own moves toward the spot price as delivery approaches, and the spread between the current futures contract and the next futures contract stays at a dollar. Investors can sell the maturing futures near the $58 spot price and buy the next future for around $59. The $1 difference between the maturing futures contract sell price, $58, and the spot price, $59, is the roll yield. In the above characterization, the profit from holding physical oil is assumed to be $0, while the loss from holding the futures contract is calculated as -$1; however, this is only true if the cost-of-carry equals $0. Suppose the cost-of-carry equals $1, from $1 in storage costs and $0 from convenience yield, the roll yield is fully explained by the cost-of-carry. In this case, investors did not suffer a loss by paying roll yield, since as an alternative investors would have to pay an equal amount of cost-of-carry to hold the physical asset. Now suppose that the cost-of-carry equals $0.50, from $0.50 in storage costs and $0 from convenience yield. The futures market is inefficient, since it would be profitable for market participants to conduct the following arbitrage: purchase spot oil at $58, pay storage costs of $0.50, sell shortfutures contracts at $59, deliver oil at $58 at contract expiry, and gain $1 from the short futures contracts at expiry to gain risk-free profits of $0.50. Market participants would have incentive to conduct this arbitrage until the selling pressure brings futures contract prices down to $58.50, when they no longer have incentive to conduct the above arbitrage. However, market participants may face obstacles to conduct the above arbitrage; they might have difficulty obtaining physical oil storage, they might lack to scale to purchase oil at the spot market price, and they might face other obstacles. In this case, when futures traders suffer a -$1 loss from purchasing futures at $59 and rolling the contracts at $58, $0.50 of the roll yield will be justified storage cost, and $0.50 will be from a inefficient price bias that could be described as a real roll yield loss. In the above example, the price bias is visible because the convenience yield is held constant at $0. Since convenience yield is often measured as the residual of subtracting the storage cost and any asset yield from the roll yield, it is difficult to separate that residual into a true convenience yield and a true market price bias. Consider the above example in one case where the true convenience yield is $1, and another case where the true convenience yield is -$1. In both cases, the observed difference between the roll yield and the cost-of-carry is still $0.50, but the price bias is -$0.50 and $1.50. In these cases, the observed difference between the roll yield and the cost-of-carry is neither a good estimator for the cost-of-carry nor for the price bias.
Effect on commodity returns
Roll yield can have a strong impact on the return of futures trading. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase and the various tradeable instruments for Crude Oil showing a much lower price increase, because of the strong negative roll yield. The USO ETF also failed to replicate Crude Oil's spot price performance. Levine, Ooi, Richardson, and Sasseville found that the roll yield, after adjusting for interest rates, made up the majority of average returns for a long-run index of commodity futures going back 140 years.
