Can someone explain the connection? Is roll return derives from basis risk? Thanks,
Roll return is affected by basis risk but its not the full story Roll return is a function of both basis risk and contract maturity. Roll Return = Change in Futures Price from time 0 to time 1 - Change in spot price from time 0 to time 1 The further away you are from contract maturity, the more basis risk you have as spot price will fluctuate more than futures price. As you near contract maturity, the less basis risk as the futures price will converge to the spot.
I would say that roll return exist because of basis and basis risk. but I don’t see that basis risk generates the roll return because of 2 arguments. 1. roll return is strictly related to relationship between futures contracts of different maturities and has nothing to do with spot price. 2. roll return happens usually when one contract expires, and then there is no basis risk. but again roll return exists because of basis. you can only have futures trading away from spot because of basis. if basis would not exist then when one contract would expire the Price expiring contract=Price new contract.