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Abstract
This paper analyzes the existence of a risk premium following the Keynesian theory of normal backwardation. A natural experiment using actual trading observations of commodity index traders is used to determine if passively holding long positions opposite hedgers earns a risk premium. Daily profits of traders are calculated in 12 markets from 2000-2009 using data from the CFTC internal large trader reporting system. Results show the commodity index traders have negative profits in 9 out of 12 commodities, resulting in an approximate net loss of -$6.9 billion. A measure of monthly return on investment does not show consistent positive profits and on average the return is negative. The evidence does not support the existence of a positive risk premium.