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An examination of momentum strategy in commodity future markets

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Abstract

Commodity futures and equity markets differ in several important respects. Nevertheless, it was found that momentum profits in commodities are highly significant for holding periods as long as 9 months, and returns to momentum strategies are roughly equal in magnitude to those that have been reported in stocks. The profits documented are too large to be subsumed by transactions costs. Although the momentum strategies appear to be quite risky, their profitability cannot be fully accounted for in the context of a market factor model. Further, it is shown that momentum profits eventually reverse if positions are maintained long enough after portfolio formation. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:227–256, 2007

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... Second, the data processing methodology used in academic papers deviates occasionally from what the markets' traders consider in practice, and this is also the case for the Chinese commodity futures market. Analytically, most of the corresponding literature, including Miffre and Rallis (2007) ;Shen, Szakmary, and Sharma (2007) ;Fuertes, Miffre, and Rallis (2010) ;Szakmary, Shen, and Sharma (2010); Basu and Miffre (2013); Dewally, Ederington, and Fernando (2013); Clare, Seaton, Smith, and Thomas (2014); Bianchi, Drew, and Fan (2015); Fuertes, Miffre, and Perez (2015), do not consider the distinctive characteristics in terms of the most preferred maturity months that every commodity contract has. ...
... On the one hand, Conrad and Kaul (1998) claim that momentum and contrarian strategies are equally likely to be successful. Locke and Venkatesh (1997) show that the futures market transaction costs are lower relative to the minimum price changes, whereas Shen, Szakmary, and Sharma (2007) and Szakmary, Shen, and Sharma (2010) find that momentum returns are statistically significant in commodity futures. Miffre and Rallis (2007) show the outperformance of momentum strategies, while contrarian strategies do not work. ...
... 11 The data can be purchased and downloaded from JYB-Capital via their website: http://www.liangyee.com/apiList. 12 The log returns are considered to be consistent with previous studies such as (Shen, Szakmary, and Sharma, 2007;Szakmary, Shen, and Sharma, 2010) among others. ...
Article
This paper tests a wide range of momentum and reversal strategies at different trading frequencies for the complete Chinese commodity futures market dataset. Accurate estimates of transaction costs for each commodity and the minute level futures prices are utilized to obtain the most realistic out-of-sample backtesting results. Distinctively from the existing literature, our dataset does not suffer from liquidity problems since the intra-day data is constructed from the most actively traded contracts for each and every of the 31 commodities included in our sample. Overall, there are three main findings of this study. First, momentum and reversal trading strategies can generate robust and consistent returns over time; however, the intra-day strategies used cannot generate sufficiently enough high excess returns to cover the excessive costs due to the higher frequency of trading. Secondly, at lower trading frequencies and longer holding periods momentum and reversal strategies can generate excess returns, but with higher maximum drawdown risk. Finally, the double-sort strategies statistically improve the performance of the trading strategies.
... Moreover, the results indicate that MomTS strategies in the commodity futures market exhibit higher performance with respect to their risk-adjusted return performance compared with passive investment in the composite commodity index, MCXCOMDEX, Nifty stock index and Clearing Corporation of India Ltd. (CCIL) bond index. In addition, transaction cost estimation using the conservative estimate given by Locke and Venkatesh (1997) and Shen et al. (2007) indicates that transaction costs reduce the magnitude of MomTS profitability, but cannot eliminate the positive returns. ...
... These portfolios generated the highest excess return of 10.8% and highest Sharpe ratio of 0.55. Shen et al. (2007) reported significant positive returns of momentum strategies for short-and middle-time skylines which were close to the returns in stocks. In addition, Miffre and Rallis (2007), Darden et al. (2009), Fuertes et al. (2010, Moskowitz et al. (2012), Gorton et al. (2013), Narayan et al. (2015), Zaremba (2016) and Bianchi et al. (2015aBianchi et al. ( , 2016 have confirmed the abnormal alpha generating capacity of momentum strategies in the commodity futures market. ...
... The value of |w m,j,t+1 w c,j,t+ | shows the absolute changes in weights for asset j at the t + 1 rebalancing point. The net momentum return is computed for the realised portfolio return MR m,p,t+1 at t + 1 by using the estimated transaction costs (tc) of 0.033% of Locke and Venkatesh (1997) and 0.146% of Shen et al. (2007), as shown in equation (8). ...
... Thus, commodity futures evolved from a pure hedging instrument for commodity risk managers into a popular liquid asset class (see Rouwenhorst and Tang, 2012;Tang and Xiong, 2012;Cheng and Xiong, 2014;Henderson et al., 2015). Because of the absence of restrictions for short sellers, their negligible transaction costs, manageable extent and high liquidity, commodity futures also offer attractive conditions for cross-sectional, time-variable investment strategies, as studied by Shen et al. (2007); Szakmary et al. (2010); Fuertes et al. (2010); Bianchi et al. (2015) or Fernandez-Perez et al. (2018a). Motivated by the popularity of commodity futures investments in practice and academia, this thesis examines passive and active investment strategies in commodity futures markets -especially, the analysis of their risk and returns. ...
... After the seminal work of Titman (1993, 2001), showing that stocks tend to continue their past performance in the near future, the striking effectiveness of cross-sectional momentum investment strategies has been verified in equity markets all over the world (see Fama and French, 2012;. In addition, research activity has quickly spilled over to commodity futures markets because, here, easier shorting, high liquidity, negligible transaction costs and an overseeable asset universe make the strategies particularly successful (see Miffre and Rallis, 2007;Shen et al., 2007;Szakmary et al., 2010;Fuertes et al., 2010Fuertes et al., , 2015Bianchi et al., 2015Bianchi et al., , 2016. 1 Unfortunately, some recent studies cast doubts on the future usefulness of momentum strategies by indicating that stock momentum profits have significantly declined or even completely vanished in the last decade (see Chordia et al., 2014;Mao and Wei, 2014;Hwang and Rubesam, 2015). In a preliminary examination, we show that similar results can be obtained for commodity momentum. ...
... Variance ratio significance is evaluated via established statistical procedures such that we do not trade based on potentially random signals but only on significant ones. Furthermore, even though earlier studies indicate that (short-term) reversal is less relevant in commodity futures markets (see Miffre and Rallis, 2007;Shen et al., 2007), our strategy design does not generally rule out its existence because, especially in commodity markets, return behavior is subject to significant variation (see Adams and Glück, 2015). In other words, we not only enhance traditional momentum by refining the signals for momentum trades but also allow the momentum strategy to consider (short-term) reversals if significant negative autocorrelation suggests doing so. ...
Thesis
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Over the last decades, commodity futures markets have grown significantly because, in addition to hedgers using futures for risk management, investors have discovered the potential of futures in investment products. Motivated by this growing importance, this thesis is concerned with the analysis of risk (in terms of the established risk measure Expected Shortfall) and investment strategies in commodity futures markets. First, we compare popular non-parametric estimators of Expected Shortfall (i. e., different variants of historical, outlier-adjusted and kernel methods) to each other, selected parametric benchmarks and estimates based on the idea of forecast combination within a multidimensional simulation setup (spanned by different distributional settings, sample sizes and confidence levels). We rank the estimators on the basis of classic error measures as well as an innovative performance profile technique, which we adapt from the mathematical programming literature. Our rich set of results supports academics and practitioners in the search for an answer to the question of which estimators are preferable under which circumstances. After that, we present a full-scale analysis of Expected Shortfall in commodity futures markets. Besides illustrating the dynamics of historic Expected Shortfall, we evaluate whether popular estimators are suitable for forecasting future Expected Shortfall. By implementing a new backtest, we find that the performance of estimators hinges on market stability. Estimators tend to fail when markets are in turmoil and accurate forecasts are urgently needed. Even though a kernel method performs best on average, our results advise against the use of established estimators for risk (and margin) prediction. Third, motivated by the deteriorating performance of traditional cross-sectional momentum strategies in commodity futures markets, we propose to resurrect momentum by incorporating autocorrelation information into the asset selection process. Put differently, we introduce measures of short and long memory (variance ratios and Hurst coefficients, respectively) telling us whether past winners and losers are likely to persist or not. Our empirical findings suggest that a memory-enhanced momentum strategy based on variance ratios significantly outperforms traditional momentum in terms of reward and risk, effectively prevents momentum crashes and is not bound to the movement of the overall commodity market. Furthermore, strategy returns cannot be explained by typical factor portfolios and macroeconomic variables and are robust to various parametrization choices, alternative data sets, transaction costs and data mining. Finally, and in contrast to a newly emerging strand of literature promoting the benefits of long memory measures in portfolio management, we show that Hurst coefficients do not carry investment-relevant information in a commodity momentum context.
... The managed futures are a sub-class of alternative investment strategies that take long/short positions across various futures markets (commodity, equity indices, foreign currency, bonds) globally. Some studies showed that tactical trading in futures markets had generated abnormal returns in the past (Gorton and Rouwenhorst 2006;Erb and Harvey 2006;Shen et al. 2007;Fuertes et al. 2010;Szymanowska et al. 2014). However, considering that managed futures strategies only trade in financial instruments listed on the exchanges, their positions are transparent, highly liquid (exchange trading, no asymmetry between short/long positions), with the minimum counterparty or credit risk. ...
... In more recent studies, the risk premium can be modeled via different observable factors in futures markets. Two major factors discussed in academic literature include momentum (Erb and Harvey 2006;Miffre and Rallis 2007;Shen et al. 2007;Szakmary et al. 2010;Moskowitz et al. 2012) and the slope of a futures' term-structure (Erb and Harvey 2006;Gorton and Rouwenhorst 2006;Fuertes et al. 2010). The momentum strategy attempts to capture significant directional moves across a diversified portfolio of assets. ...
... Those authors expanded the group of systematic factors and conducted research with MSCI indices. Momentum strategies were analyzed by Chabot et al. (2008); Chabot et al. (2014);Campbell (2004); Vogel and Gray (2015); Elias et al. (2014); Foltice and Langer (2015); Hong and Stein (1998);Hurst et al. (2014); Yu and Chen (2012); Krauss et al. (2015); Martin (2021); Martins et al. (2016); Menkhoff et al. (2012); Roncalli (2017); (Shen et al. 2007); and Tauseef and Nishat (2018). Some authors even focused on modern machine learning ranking algorithms for cross-sectional momentum strategies (Poh et al. 2020). ...
Article
Full-text available
Systematic momentum trading is a prevalent risk premium strategy in different portfolios. This paper focuses on the performance of the managed futures strategy based on the momentum signal across different economic regimes, focusing on the COVID-19 pandemic period. COVID-19 had a solid but short-lived impact on financial markets, and therefore gives a unique insight into momentum strategies’ performance during such critical moments of market stress. We offer a new approach to implementing momentum strategies by adding macroeconomic variables to the model. We test a managed futures strategy’s performance with a well-diversified futures portfolio across different asset classes. The research concludes that constructing a portfolio based on academically/economically sound momentum signals with its allocation timing based on broader economic factors significantly improves managed futures strategies and adds significant diversification benefits to the investors’ portfolios.
... PageRank score Moskowitz et al. (2012) 0.025678867 Miffre and Rallis (2007) 0.020130864 Erb and Harvey (2006) 0.017890951 Shen et al. (2007) 0. 017783906 Fama (1970) 0.017252501 Kim et al. (2016) 0.017252501 ...
... Erb and Harvey (2006) claim tactical strategies provide higher mean returns in the commodity futures market. Shen et al. (2007) conclude that momentum payoffs in commodities futures markets are prominent for nine-month investment horizons, and the payoffs are similar in magnitude to stocks. They infer that though momentum strategies are risky, the payoffs derived are too high to be subsumed by transaction costs and the market factor model cannot validate these returns. ...
Article
Abstract Purpose Over the past three decades, numerous conceptual and empirical studies have discussed momentum investment strategies’ presence, pervasiveness and persistence. However, science mapping in the field is inadequate. Hence, this study aims to comprehend and explore current dynamics, understand knowledge progression, elicit trends through thematic map analysis, synthesize knowledge structures and provide future research directions in this domain. Design/methodology/approach The study applies bibliometric analysis on 562 Scopus indexed articles from 1986 to 2021. Biblioshiny version 3.1.4, a Web-based application included in Bibiliometrix package developed in R-language (Aria and Cuccurullo, 2017), was used to examine: the most prominent articles, journals, authors, institutions and countries and to understand the thematic evolution and to elicit trends through the synthesis of knowledge structures including conceptual, intellectual and social structures of the field. Findings Motor themes, basic transverse, niche and emerging and declining themes were identified using (Callon, 1991) strategic thematic map. Besides, four major clusters based on a cocitation network of documents were identified: empirical evidence and drivers of momentum returns, theories explaining momentum returns and implications for asset pricing and market efficiency, avoiding momentum crashes and momentum in alternative asset classes, alternative explanations for momentum returns. The study infers that momentum research is becoming multidisciplinary given the dominance of behavioral theories and economic aspects in explaining the persistence of momentum profits and offers future research directions. Research limitations/implications The study deploys bibliometric analysis, appropriate for deriving insights from the vast extant literature. However, a meta-analysis might offer deeper insights into specific dimensions of the research topic. Besides, the study’s findings are based on Scopus indexed articles analyzed using bibilioshiny; the database and software limitations might have affected the findings. Practical implications The study is a ready reckoner for scholars who intend to recognize the evolution of momentum investment strategies, current dynamics and future research direction. The study offers practitioners insights into efficiently designing and deploying momentum investment strategies and ways to avoid momentum crashes. Social implications The study offers insights into the irrational behavior and systematic errors committed by market participants that helps regulators and policymakers to direct investors’ educational efforts to minimize systematic behavioral errors and related adverse financial consequences. Originality/value This comprehensive study on momentum investment strategies evaluates research trends and current dynamics draws a thematic map, knowledge progression in the field and offers future research directions.
... Alternative explanations rely on behavioral models such as Barberis et al. [6], Daniel et al. [23] and Hong and Stein [44] which attribute price trend and abnormal returns to a slow assimilation of information into prices and to the cognitive errors that investors make when pricing information. 6 Attempts have also been made to implement cross-sectional momentum strategies in commodity futures markets ( [29,57,62,66], to cite only the earliest papers). The ranking period over which past performance is measured and the holding period of the long-short portfolios range from 1 to 12 months, with equal weights assigned to the portfolio constituents. ...
... Reasons have been brought forward in support of both a behavioral explanation and a rational pricing explanation. For example, Miffre and Rallis [57], Shen et al. [66] or Moskowitz et al. [58] show that momentum profits eventually reverse if one holds the long-short portfolios long enough; namely, beyond a year after portfolio formation. This can be considered as a sign of initial under-reaction and subsequent mean-reversion [48], a result that is in support of the sentiment-based behavioral theories of Barberis et al. [6], Daniel et al. [23], and Hong and Stein [44]. ...
Article
This article reviews recent academic studies that analyze the performance of long-short strategies in commodity futures markets. Special attention is devoted to the strategies based on roll-yields, inventory levels or hedging pressure that directly arise from the theory of storage and the hedging pressure hypothesis. Alternative strategies based on past performance, risk, value, skewness, liquidity or inflation betas are also studied, alongside with recent attempts to enhance performance by modifying or combining the original signals. Overall, the literature highlights the superiority of being long-short in commodity futures markets relative to being long-only.
... For example, none of the aforementioned literature examines the relationship between formation-holding window and the profitability of GGR. Although some literature (Jegadeesh and Titman, 2001;Shen et al., 2007;Bianchi et al., 2015Bianchi et al., ,2016 investigates the post-holding-period return of JT momentum by studying the holding period returns of up to 60 months after portfolio formation, they do not show whether these post-holding-period returns are statistically significant across the formation-holding windows. Without testing the statistical significance, the pattern of post-holding-period returns might be spurious because the inference is based on a sample rather than the entire population. ...
... There is no daily or monthly gap skip between formation and holding periods since trading strategies in the commodities market do not suffer from the short-term reversal and bid-ask bounce effects (Bianchi et al., 2015(Bianchi et al., ,2016, skipping the first month yields inferior results (Shen et al., 2007;Fuertes et al., 2010). By repeating the J×K implementation cycle forward 1-month each time, there are K overlapping trading periods of excess returns, which are averaged to yield monthly excess return series for each strategy (Fuertes et al., 2010). ...
Article
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Purpose – Motivated by the debate on the patterns and sources of commodity futures returns, this paper investigates the performance of three investment trading strategies, namely, the momentum strategy of Jegadeesh and Titman (1993), the 52-week high momentum strategy of George and Hwang (2004) and the pairs trading strategy of Gatev et al. (2006) in the commodity futures market. Design/methodology/approach – The three strategies are those given by Jegadeesh and Titman (1993), George and Hwang (2004) and Gatev et al. (2006), respectively. Findings – The authors find that there is no significant reversal profit across 189 formation-holding windows for all the three strategies. However, there are statistical and economically significant momentum profits, and the profitability increases with the rising of formation-holding periods. Momentum returns are quite sensitive to market conditions but the crash of momentum returns is partly predictable. Return seasonality, risk and herding also provide partial explanation of the momentum profits. Originality/value – The authors are the first to compare the performances of the pairs trading strategy of Gatev et al. (2006), the conventional momentum of Jegadeesh and Titman (1993), and the 52-week high momentum of George and Hwang (2004) under 189 formation-holding windows. Also, the authors are the first to investigate the association between herding behaviour and momentum returns in the commodity futures market.
... For example, none of the aforementioned literature examines the relationship between formation-holding window and the profitability of GGR. Although some literature (Jegadeesh and Titman, 2001;Shen et al., 2007;Bianchi et al., 2015Bianchi et al., , 2016 investigates the post-holding-period return of JT momentum by studying the holding period returns of up to 60 months after portfolio formation, they do not show whether these post-holding-period returns are statistically significant across the formation-holding windows. Without testing the statistical significance, the pattern of postholding-period returns might be spurious because the inference is based on a sample rather than the entire population. ...
... For all the aforementioned trading strategies (CC, FI, JT and GH), a statistically significant negative (positive) return for reversal strategy means profit (loss) for momentum strategy. There is no daily or monthly gap skip between formation and holding periods since trading strategies in the commodities market do not suffer from the short-term reversal and bid-ask bounce effects , skipping the first month yields inferior results (Shen et al., 2007;Fuertes et al., 2010). In line with the literature, we use the reversal strategy of GGR but momentum strategy of JT and GH as default setting, unless stated otherwise. ...
Article
Purpose Motivated by the debate on the patterns and sources of commodity futures returns, this paper investigates the performance of three investment trading strategies, namely, the momentum strategy of Jegadeesh and Titman (1993), the 52-week high momentum strategy of George and Hwang (2004) and the pairs trading strategy of Gatev et al. (2006) in the commodity futures market. Design/methodology/approach The three strategies are those given by Jegadeesh and Titman (1993), George and Hwang (2004) and Gatev et al. (2006), respectively. Findings The authors find that there is no significant reversal profit across 189 formation-holding windows for all the three strategies. However, there are statistical and economically significant momentum profits, and the profitability increases with the rising of formation-holding periods. Momentum returns are quite sensitive to market conditions but the crash of momentum returns is partly predictable. Return seasonality, risk and herding also provide partial explanation of the momentum profits. Originality/value The authors are the first to compare the performances of the pairs trading strategy of Gatev et al. (2006), the conventional momentum of Jegadeesh and Titman (1993), and the 52-week high momentum of George and Hwang (2004) under 189 formation-holding windows. Also, the authors are the first to investigate the association between herding behaviour and momentum returns in the commodity futures market.
... Bhojraj and Swaminathan (2006) reveal that the momentum phenomena generated during the first year would reverse in two years. Shen, Szakmary, and Sharma (2007) find that momentum profits in commodities are significant for holding periods as long as nine months, and returns to momentum strategies are closely equal in magnitude to those that have been reported in stocks. George and Hwang (2004) also show that short-run momentum and long-run reversals are largely separate phenomena, which present a challenge to the current theory. ...
Article
Journal of Financial Studies: By employing intraday tick data due to big data concerns, we examine whether investors profit by day trading China Stock Index 300 Futures (C300F) as the C300F index rises (falls) over considerable points in a minute, which is defined as intraday large price change in this study. We argue that the intraday large price change would stimulate the sentiments of investors and even induce investors to trade the C300F. To the best of our knowledge, the aforementioned issue has not been examined in the relevant literature. Results reveal that investors are likely to make profits by taking short positions on the C300F right after the occurrence of the intraday large price change, except when the C300F falls from extremely high points like 20 points in a minute.
... Evidence of momentum has also been found in international stock markets, see, e.g.,Fama and French (1998);Teplova and Mikova (2015), emerging markets see, e.g.,Rouwenhorst (1999);Zaremba and Szyszka (2016), country indices, see, e.g.,Asness et al. (1997), industries, see, e.g.,Moskowitz and Grinblatt (1999), size and B/M factors, see, e.g.,Lewellen (2002), commodities, see, e.g.,Miffre and Rallis (2007);Shen et al. (2007), and global asset classes, see, e.g.,Asness et al. (2013).2 SeeDaniel and Moskowitz (2016). ...
Article
Full-text available
We compare the performance of two volatility scaling methods in momentum strategies: (i) the constant volatility scaling approach of Barroso and Santa-Clara (2015), and (ii) the dynamic volatility scaling method of Daniel and Moskowitz (2016). We perform momentum strategies based on these two approaches in an asset pool consisting of 55 global liquid futures contracts, and further compare these results to the time series momentum and buy-and-hold strategies. We find that the momentum strategy based on the constant volatility scaling method is the most efficient approach with an annual return of 15.3%.
... The literature provides a wide range of different investment strategies (see, e.g., Burgess 2000;Conrad and Kaul 1998;DeMiguel et al. 2009;Menkhoff et al. 2012;Sawik 2012;Shen et al. 2007;Szakmary et al. 2010;Vrugt et al. 2004;Zagrodny 2003) and we are typically concerned with the question of whether a given investment strategy is optimal among a set of alternatives. 1 In order to validate our hypothesis, we usually compare the performance of our benchmark, e.g., its certainty 1 A different question is whether some asset universe allows the investor to achieve a higher performance compared to another asset universe (Hanke and Penev 2018). ...
Article
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An intersection–union test for supporting the hypothesis that a given investment strategy is optimal among a set of alternatives is presented. It compares the Sharpe ratio of the benchmark with that of each other strategy. The intersection–union test takes serial dependence into account and does not presume that asset returns are multivariate normally distributed. An empirical study based on the G–7 countries demonstrates that it is hard to find significant results due to the lack of data, which confirms a general observation in empirical finance.
... Shen, Szakmary, and Sharma show that momentum profits are concentrated in the growth stock indices, but short-term overreaction is revealed in other indices [45]. Shen et al. further find that momentum profits in commodities are highly significant for holding periods as long as 9 months [54], but momentum profits would eventually reverse. ...
Article
Stock price overreaction seems always regarded as an essential issue in recent decades. Due to big data concerns, this study explores whether investors can make profits by trading the constituent stocks of DJ30, FTSE100, and SSE50 as stochastic oscillator indicator (SOI) staying in diverse overreaction zones including overbought and oversold, stricter overbought and oversold, and extreme overbought and oversold zones for consecutive days. Although we argue that the SOI staying in overreaction zones for consecutive days is often appeared in the real world, this issue, to our knowledge, seems unexplored in the existing literature. Results show that momentum strategies are appropriate for holding these stocks in the long run as the SOI staying in overbought zones, whereas contrarian strategies are proper for holding these stocks in the short run as the SOI staying in oversold zones. These revealed results may be beneficial for investors to trade these stocks as the SOI staying in overreaction zones for consecutive days.
... ,Shen et al. (2007),Marshall et al. (2008),Szakmary et al. (2010),Narayan et al. (2014), andNeuhierl and Thompson (2016), for contributions investigating whether speculative trading has been a driver of the observed boom in commodity prices see inter aliaStoll and Whaley (2011), Henderson et al. (2015),Singleton (2014), andHamilton and Wu (2015). ...
Thesis
Die globale Finanzkrise unterstrich die Bedeutung von makrofinanziellen Verknüpfungen für Vermögenspreisdynamiken und Konjunkturschwankungen. Bei angebotsseitigen Finanzfriktionen werden hierbei Finanzintermediäre, insbesondere ihre Bilanz und ihre Risikotragfähigkeit, als zentral erachtet. Diese Dissertation wendet verschiedene Klassen von SVAR Modellen und neueste Identifizierungsmethoden an um empirische Belege für die Rolle von Finanzintermediären für Finanzmärkte und die Realwirtschaft zu liefern. Das erste Kapitel untersucht das regimeabhängige Handelsverhalten von Finanzintermediären auf dem Öl-Futures-Markt und zeigt, dass Finanzintermediäre während Krisenzeiten preisunelastischer werden und mehr ihren eigenen Interessen folgend handeln. Die Ergebnisse deuten auf eine nichtlineare Futures-Preissetzung von Intermediären hin, was die Volatilität im Markt während Krisenzeiten signifikant erhöht. Das zweite Kapitel legt dar, dass die meisten Händlergruppen in Rohstoff-Futures-Märkten eine antizyklische Investitionsstrategie verfolgen. Das einfache SVAR Modell eignet sich für die Analyse der Handelsstrategien verschiedener Händlergruppen sowie deren Auswirkungen für die Preisvolatilität in jedweden Vermögensmärkten. Kapitel 3 identifiziert in einem einzelnen Modell sektorspezifische Kreditangebotsschocks gegenüber Firmen und Haushalten und präsentiert empirische Belege über deren Effekte für die US-Wirtschaft. Die Ergebnisse zeigen, dass beide Kreditangebotsschocks wesentlich zum Konjunkturverlauf während des Beobachtungszeitraums beigetragen haben, wobei Kreditangebotsschocks gegenüber Haushalten klassischen Nachfrageschocks ähneln. Das letzte Kapitel analysiert die globalen Auswirkungen des Schuldenabbaus europäischer Banken und findet, dass europäische Bankbilanzschocks Bruttokapitalzuflüsse und das Kreditwachstum in fortgeschrittenen Ökonomien mit entwickelten Finanzmärkten beeinflussen, aber nur geringfügige Effekte auf das Wirtschaftswachstum haben.
... 13 Following convention, we examine the 12-month commodity futures momentum as well as the 12-month stock momentum and we additionally examine the 1-month commodity futures momentum for several reasons. 14 First, the 1-month commodity futures momentum returns show the lowest correlation with the stock momentum returns and the 1-month commodity futures loser shows the largest negative return in Table 2. Shen, Szakmary, and Sharma (2007) also report that the 1-month momentum is strongest in the commodity futures markets. Moreover, the 1-month commodity futures loser also shows the greatest differences in skewness and kurtosis compared to the stock loser in Table 1. ...
Article
This paper explores the benefits of extending the investment universe to commodity futures, from the perspective of momentum traders. We find that the growth‐optimal portfolio includes negative (positive) weights on commodity futures losers (stock winners). Motivated by this finding, we construct a joint momentum strategy, buying stock winners and selling commodity futures losers, and show that it generates an average monthly return of up to 1.91% and provides much lower skewness (0.04) and kurtosis (1.27) than a traditional stock momentum strategy. It also greatly improves profitability, especially in unfavorable market states, and thus effectively manages tail risk.
... Finally, the momentum factor is the difference between the return of a portfolio of commodity futures with highest prior 12-month return and the return of a portfolio of commodity futures with lowest prior 12-month return. 5 Gorton et al. (2012), Shen et al. (2007) and Narayan et al. (2015) have documented robust momentum effects in commodity futures returns. Table 3 reports summary statistics for the commodity-specific factors from January 1989 to December 2012. ...
Article
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The aim of this paper is to assess whether three well-known commodity-specific variables (basis, hedging pressure, and momentum) may improve the predictive power for commodity futures returns of models otherwise based on macroeconomic factors. We compute recursive, out-of-sample forecasts for the monthly returns of fifteen commodity futures, when estimation is based on a stepwise model selection approach under a probability-weighted regime-switching regression that identifies different volatility regimes. We systematically compare these forecasts with those produced by a simple AR(1) model that we use as a benchmark and we find that the inclusion of commodity-specific factors does not improve the forecasting power. We perform a back-testing exercise of a mean–variance investment strategy that exploits any predictability of the conditional risk premium of commodities, stocks, and bond returns, also consider transaction costs caused by portfolio rebalancing. The risk-adjusted performance of this strategy does not allow us to conclude that any forecasting approach outperforms the others. However, there is evidence that investment strategies based on commodity-specific predictors outperform the remaining strategies in the high-volatility state.
... In other words, investors may rely on past prices when taking positions on commodity futures and this may provide an explanation for the documented " causality " from returns to index fund flows. For example, empirical evidence has shown that momentum strategies involving commodity futures are widely followed and are highly profitable (Miffre and Rallis, 2007; Shen et al., 2007; Fuertes et al., 2010, and others). ...
Article
Using a dataset on positions of index fund investors, we examine the relationship between trading activity and the returns and volatility of three prominent agricultural food commodities: corn, soybeans and wheat. We find that the positive co-movement between changes in index fund positions and excess agricultural futures returns is driven by the 2008/2009 financial crisis. Extensive Granger causality tests show that position changes bear predictive ability for subsequent returns and volatility of soybeans and corn. Finally, there is slightly stronger evidence that returns Granger-cause position changes suggesting that market participants follow momentum strategies.
... Turning to commodity markets, Shen et al. (2007) find positive returns to top-tertile minus bottom-tertile crosssectional commodity futures portfolios. The authors report that this effect is strongest for shorter holding periods (one or two months) and robust to trading costs, systematic risk adjustment, and different sample periods. ...
Article
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This paper is the second of a two-part series that provides essential context for any serious study of alternative risk premium (ARP) strategies. Practitioners uniformly emphasize the academic lineage of ARP strategies, regularly citing seminal papers. However, a single, comprehensive review of the copious research underpinning the category does not exist. This paper provides a comprehensive review of ARP’s academic roots, explaining that it sits at the confluence of decades of research on empirical anomalies, hedge fund replication, multi-factor models, and data snooping.
Article
We empirically investigate the effect of managing volatility in commodity momentum. Using Chinese commodity futures data, we show that managing volatility significantly improves the performance of commodity momentum. Including the new strategy significantly enhances asset allocation performance. Then, we explore several potential explanations for the profitability of the new strategy. Commodity‐specific factors, business cycle risk, financial market conditions, investor sentiments, transaction costs, leverage constraints, and data‐snooping bias do not fully account for this profitability. The profitability is in line with the predictability of momentum‐specific risk rather than aggregate market risk. Comprehensive robustness checks support our main findings.
Article
The growth in commodity-related investments has sparked interest in the performance of momentum strategies in these markets. This paper introduces a behavioral proxy of the 52-week high and low momentum that explains a significant proportion of the variation of conventional momentum returns after controlling for commodity specific risk factors. Our findings show that the 52-week high strategy generates significant profits after accounting for transaction costs. We report that the 52-week high strategy is a better predictor of returns than conventional momentum. Our findings suggest that term structure and hedging pressure risk factors provide only a partial explanation of the results.
Article
This paper provides a review of the Fractal Market Hypothesis (FMH) focusing on financial times series analysis. In order to put the FMH into a broader perspective, the Random Walk and Efficient Market Hypotheses are considered together with the basic principles of fractal geometry. After exploring the historical developments associated with different financial hypotheses, an overview of the basic mathematical modelling is provided. The principal goal of this paper is to consider the intrinsic scaling properties that are characteristic for each hypothesis. In regard to the FMH, it is explained why a financial time series can be taken to be characterised by a 1/t1−1/γ scaling law, where γ>0 is the Lévy index, which is able to quantify the likelihood of extreme changes in price differences occurring (or otherwise). In this context, the paper explores how the Lévy index, coupled with other metrics, such as the Lyapunov Exponent and the Volatility, can be combined to provide long-term forecasts. Using these forecasts as a quantification for risk assessment, short-term price predictions are considered using a machine learning approach to evolve a nonlinear formula that simulates price values. A short case study is presented which reports on the use of this approach to forecast Bitcoin exchange rate values.
Article
This paper uses a non-parametric model to examine time-varying correlations for energy and other commodities and tests their economic importance by combining dynamic correlations with the momentum strategy. Our empirical analysis offers three new findings. First, the profits from a trading strategy that accounts for the patterns in correlations are higher than the profits that do not account for the time-varying correlations. Second, profits are asymmetric to higher and lower levels of correlation. Profits are maximized at higher levels of correlation. These profits are robust to the financialization period and the backwardation and contango phases of the commodity market. Finally, the economic source of profits reveals that profits are largely explained by the basis and momentum factors, the exception being grains and softs portfolios at higher correlation levels.
Article
We examine the performance of trend following strategies in Chinese commodity futures markets. We provide evidence that trend following-based technical trading rules yield better performance than the buy and hold strategy on both individual contracts and sorted portfolios. The outperformance is robust to transaction costs, data frequency, sub-prime crisis, shorting constraint, delayed execution, liquidity and parameters. Finally, the profitability of the trend following strategy may be subject to data snooping bias.
Chapter
This chapter presents a good overview of how technical trading evolved from a backwater to become a major theme of respected academic anomaly research. Notably, technical analysis, or charting, has a long history in finance. Therefore, this chapter illustrates some of the numerous academic studies completed over the past century that have investigated the profitability of various trading strategies based on past price patterns. The consensus among these past studies is that two interesting patterns in stock returns tend to surface from the data over time: short-term to medium-term momentum, and long-term reversals. Additionally, momentum in stock returns is generally described as the continuation of those stocks that have performed well for subsequent 1–12 months.
Article
This paper examines whether commodity futures momentum can predict business cycles in the US, China, UK, Japan, and India. Momentum as a risk factor may play a role as a state variable in the spirit of Liew and Vassalou (2000). We find significant and negative predictability of commodity futures momentum, although the basis factor of the commodity futures markets shows insignificant results. Moreover, we find that commodity futures momentum is an independent factor that cannot be fully explained by traditional risk factors, macroeconomic variables, or commodity sector momentum. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark
Article
We study momentum and mean-reversion strategies in commodity futures prices and their relationship to momentum and mean-reversion in commodity spot prices. We find that momentum performs well in futures markets, but not in spot markets, and that mean-reversion performs well in spot markets, but not in futures markets. A decomposition of the basis (the slope of the term-structure of futures prices) into expected risk premiums and expected changes in spot prices helps us shed some light on the different results across the futures and spot markets. Most interestingly, we find that momentum in futures prices cannot be explained by a sustained trend in spot prices.
Article
We propose a new trading strategy named the historical basis strategy and analyze its profitability in both the Chinese and the US commodity futures markets. We also compare the profitability of momentum strategy and carry strategy with that of historical basis strategy. The results indicate that the three strategies are profitable in both markets, especially historical basis strategy performs superior to the momentum strategy and inferior to the carry strategy. We also find that the performance of portfolio investment based on the commodity futures' trading strategies is significantly better than based on the commodity futures themselves, and both of them can achieve diversification benefits in stock-bond-currency portfolios. Furthermore, if energy futures are added to trading strategies and portfolios, their profitability rises significantly while the risks increase.
Article
A growing body of literature confirms the significance of the commodity futures basis factor. It has a significantly positive premium and it explains the cross-section of commodity-futures excess returns. We extend the literature by documenting the predictive relation between this factor and the inter-quartile spread in the basis; the predictability of the basis factor return has not been previously reported. From the simple regression analysis of the historical commodity futures data we show that the basis spread is a strong predictor of the basis factor return. We discuss the implication of this finding on the nature of the basis factor; we also discuss the market timing strategies based on the basis spread.
Article
We study whether simple technical trading strategies enjoying large popularity among practitioners can be employed profitably in the context of hedge portfolios for Crude Oil, Natural Gas, Gasoline and Heating Oil futures. The strategies tested are based on mean-reverting calendar spread portfolios established with dynamic hedge ratios. Entry and exit signals are generated by so-called Bollinger Bands. The trading system is applied to twenty-two years of historical data from 1992 to 2013 for various specifications, taking transaction costs into account. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are compared to orders placed by the trading system. Whereas we find most combinations involving the front-month and second-month futures to be significantly profitable for all commodities tested, the best results for the risk-adjusted Sharpe Ratio are obtained for WTI Crude Oil and Natural Gas, with Sharpe Ratios in excess of 2 for most combinations and a rather smooth performance for all calendar spreads. Based on our results, there is a serious doubt whether energy futures markets can be considered weakly efficient in the short-term.
Article
Virtually all evidence on the efficacy of momentum strategies arises from the post-1962 era, and momentum returns across different markets and asset classes are highly positively correlated. We examine industry momentum in an earlier time and find that these strategies would have earned gross returns over the 1900–1925 period that are at least equal to those in the modern era; however, there is little evidence of profitability before 1900. The paucity of industry coverage in the earlier years of the Cowles database likely does not explain this differential profitability. We also show that the market state dependence of momentum strategies in the 1900–1925 period is similar to the modern era.
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This paper examines profitable trading strategies that jointly exploit momentum and reversal signals in commodity futures. While the single-sort momentum strategies returns 11.14% per annum, on average, a consistent reversal pattern of momentum profits is pronounced from 12 to 30 months after portfolio formation. Combining the observed reversal pattern with the momentum signal, our double-sort strategy returns 20.24% per annum, which significantly outperforms single-sort strategies. The proposed strategy is robust to seasonality effects and sample adjustments in commodity futures. The profitability of the double-sort strategy cannot be explained by standard risk factors, term structure, market volatility, investor sentiment, data-mining or transaction costs, but appears to be related to global funding liquidity. As a consequence, the double-sort strategy in commodity futures may be employed as a portfolio diversification tool.
Article
We show that previous findings regarding the profitability of trend-following trading rules over intermediate horizons in futures markets also extend to individual U.S. stocks. Portfolios formed using technical indicators such as moving average or channel ratios, without employing cross-sectional rankings of any kind, tend to perform about as well as the more commonly examined momentum strategies. The profitability of these strategies appears significant, both statistically and economically, through 2007, but evidence of profitability vanishes after 2007. Market-state dependence, while clearly present, does not explain the post-2007 reduction in returns to these strategies.
Article
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In this paper, we examine the presence of short-term and long-term momentum returns in Indian stock market. The study also tries to shed light on the power of asset pricing models and select macroeconomic variables in explaining momentum returns. The results confirm the presence of short-term and long-term momentum returns in Indian stock market. It is also found that Carhart four-factor model’s performance is relatively superior to other factor models such as one factor capital asset pricing model and Fama–French three-factor model in terms of capturing momentum returns. Finally, macroeconomic variables which are considered for analysis do not have any power to explain momentum returns.
Article
Purpose The purpose of this paper is to investigate whether the interaction between sentiments and past prices can lead to higher abnormal profit in futures markets. Such examinations allow the authors to relate the paper to the debate that focuses on examining the behavior of different types of traders in futures market, and who among these traders destabilize the markets. Design/methodology/approach First, the authors develop new dynamic strategies in US futures market that combine sentiment by type of traders based on trader position provided by the Disaggregated Commitments of Traders with short-term contrarian signals. Next, the authors adjust the abnormal profits to the CAPM model and Miffre and Rallis’s (2007) model. Finally, the authors use the Du (2012) decomposition methodology. Findings The main findings are that the abnormal profit is more pronounced when the authors combine past returns with lagged high producer/merchant/processor/user or low managed money sentiment. The results from swap dealer or other reportable groups show that there is no pervasive directional relation between their sentiment and contrarian profit. A further investigation of the sources of abnormal profits demonstrates that these profits survive even after the adjustment of obtained return to risk. Instead, these profits are mainly due to the overreaction to the news by irrational traders. Originality/value Based on behavioral finance theories, the authors conclude that producer, merchant, processor and user behave like irrational traders, while managed money traders behave like rational ones. Given that current regulatory proposes the limitation of speculation, the policy implications of these results are important. Therefore, these findings suggest that policy distinctions on trading motives may be more challenging to construct than ever.
Article
A new type of momentum based on the signs of past returns is introduced. This momentum is driven primarily by sign dependence, which is positively related to average return and negatively related to return volatility. An empirical application using a universe of commodity and financial futures offers supporting evidence for the existence of such momentum. Investment strategies based on return signal momentum result in higher returns and Sharpe ratios and lower drawdown relative to time series momentum and other benchmark strategies. Overall, return signal momentum can benefit investors as an effective strategy for speculation and hedging.
Article
This paper identifies a trend factor that exploits the short‐, intermediate‐, and long‐run moving averages of settlement prices in commodity futures markets. The trend factor generates statistically and economically large returns during the post‐financialization period 2004–2020. It outperforms the well‐known momentum factor by more than nine times the Sharpe ratio and has less downside risk. The trend factor cannot be explained by the existing factor models and is priced cross‐sectionally. Finally, we find that the trend factor is correlated with funding liquidity measured by the TED spread. Overall, the results indicate that there are significant economic gains from using the information on historical prices in commodity futures markets.
Article
This study examines intraday time series momentum in Bitcoin. Unlike stock markets, Bitcoin trades 24 h a day and therefore has not got a clear opening and closing period. Therefore, we use trading volume as a proxy for the market trading time and show that the first half-hour positively predicts the last half-hour return. We find that the first trading sessions with the highest volume or volatility are associated with the greatest predictability for intraday time series momentum. We also show that intraday momentum-based trading yields substantial economic gains in terms of market timing and asset allocation, especially in periods of a market downturn in Bitcoin. Consistent with the finding in foreign exchange markets, our results also show that the Bitcoin intraday momentum is driven by liquidity provision rather than late-informed trading.
Article
This paper formulates and examines a new type of bivariate time series trading strategy based on signals generated from cross-country quantiles of return distributions. We conduct rolling quantile trading strategies separately in the U.S. and Chinese futures markets for soybeans, wheat, corn and sugar over very short (daily, intraday and overnight) holding periods. Overall, we find that these practical strategies outperform various benchmarks and there is a large profit potential when trades follow quantile-based signals rather than focusing on the median only. The results highlight the value of cross-country trading strategies and the harnessing of information from different parts of the return distributions which have so far been neglected.
Article
We are the first to document an alpha momentum effect in commodity markets. We demonstrate a strong cross-sectional relationship between future commodity returns and past alphas derived from pricing models that control for major risk factors. A strategy of going long (short) in commodities with the highest (lowest) alphas delivers economically and statistically significant payoffs and produces higher risk-adjusted returns that are approximately double the standard price momentum. Alpha momentum is not subsumed by conventional risk factors, including price momentum although price momentum is subsumed by alpha momentum. Our results are robust to numerous considerations, including alternative evaluation models, different holding periods, trading costs, subperiod analysis and alternative implementation techniques.
Article
Various trend-following trading rules have been shown to be valuable for predicting market directions and thus the formulation of investment strategies. However, recent equity market research has provided striking evidence that the predictive power of such rules appears to diminish over time due to increased investor attention and lowered arbitrage barriers. Given that trend-following rules are also very successful and have been widely used in futures markets, we analyze whether a similar effect can be observed for commodity futures contracts. Using a trend regression approach based on time-varying success ratios, we detect significantly higher predictive accuracy for cross-sectional than for time-series strategies. In addition, with the exception of a few commodities, we find no significant trending behavior in trading rule reliability. These results, which are robust in a variety of settings, indicate strong momentum stability in futures markets and justify the application of this class of trading rules in commodity futures investing.
Article
This study examines the time‐series momentum in China's commodity futures market. We find that a time‐series momentum strategy outperforms classical passive long and cross‐sectional momentum strategies in terms of the Sharpe ratio, risk‐adjusted excess returns, and cumulative returns. The time‐series momentum strategy with a 1‐month look‐back period and a 1‐month holding period exhibits the best performance. We observe clear time‐series momentum patterns and find that the time‐series momentum strategy is effective in the Chinese commodity futures market. However, the momentum lasts for less time in China than in the United States because China's futures market seems to have a greater number of speculative investors.
Article
Utilizing the Commodity Futures Trading Commission’s Commitment of Traders report, we examine the behavior of traders in three large agricultural futures markets (corn, soybean, and wheat) when prices are at a key technical trading level—the 52-week high (the highest price during the past year). Our empirical results confirm that, consistent with hedging behavior, commercial traders tend to be negative feedback traders, while non-commercial traders tend to be momentum traders. In both cases, there is a moderating effect when the market is at the 52-week high. For non-commercial traders, this effect is concentrated in short positions. Although we find no evidence of a broad market timing ability from any trader type, trader positions appear to be more informative when the market is at the 52-week high. Our results have implications for traders attempting to time market entry.
Article
Economic variables are often used for forecasting commodity prices, but technical indicators have received much less attention in the literature. This paper demonstrates the predictability of commodity price changes using many technical indicators. Technical indicators are stronger predictors than economic indicators, and their forecasting performances are not affected by the problems of data mining or time changes. An investor with mean–variance preference receives utility gains of between 104.4 and 185.5 basis points from using technical indicators. Further analysis shows that technical indicators also perform better than economic variables for forecasting the density of commodity price changes.
Article
We investigate the investability of commodity risk premia in China. Previously documented standard momentum, carry and basis-momentum factors are not investable due to the unique liquidity patterns along the futures curves in China. However, dynamic rolling and strategic portfolio weights significantly boost the investment capacity of such premia without compromising its statistical and economic significance. Meanwhile, style integration delivers enhanced performance and improved opportunity sets. Furthermore, the observed investable premia are robust to execution lags, stop-loss, illiquidity, sub-period specifications, seasonality and transaction costs. They also offer portfolio diversification for investors. Finally, investable commodity premia in China reveal strong predictive ability with global real economic growth.
Article
Prior research in hedge fund and mutual fund management finds a positive relation between portfolio distinctiveness and subsequent performance, suggesting that strategy differentiation is associated with superior skill. We find that commodity trading advisors (CTAs) with returns that correlate more strongly with those of peers feature higher performance and are more highly exposed to a time series momentum factor. Strategy conformity appears to be a signal of managerial skill in CTAs, in contrast to hedge funds and mutual funds. These results indicate that a common trend following strategy drives CTA returns and that CTAs offer investors an opportunity to invest in momentum.
Article
We provide a broad empirical analysis for cross-sectional excess returns in the Chinese commodity futures market. We find two commodity futures strategies, the carry and the momentum, provide significant returns. These two factors, along with a commodity average factor, explain most cross-sectional variations in the Chinese commodity futures market. We then discuss economic interpretations for commodity carry and momentum in China in comparison with their US counterparts. We show that commodity carry in China provides a lower return than the one in the US because it is not compensated by the equity volatility innovation risk. The commodity momentum in China is closely related to the individual investors' behavioural bias of herding effects in the Chinese equity market.
Article
This paper examines whether the volatility management suggested by Moreira and Muir to improve profitability in the equity market can generate significant benefits both in‐sample and out‐of‐sample in commodity futures markets as well. The in‐sample results show the significant success of volatility management from the 12‐month momentum and market portfolio, but the out‐of‐sample results show that volatility management fails to improve real‐time performance, which indicates that in‐sample results are not obtainable for real‐time investors in the commodity futures markets. To understand the failure of volatility management, we perform the simulation analysis and find that a negative risk‐return relation seems to play a pivotal role in addition to strong volatility persistency to make volatility management successful.
Article
We analyze basis-momentum, the difference between the past 12 months’ momentum in first- and second-nearby futures contracts suggested by Boons and Prado (2018). Since basis-momentum is related to the slope and the curvature over the ranking period, we split the 12-month ranking period into three subperiods—the current month, the past five months, and the six months before the previous five months—and construct three basis-momentums with them. Our results show that these three basis-momentums differ substantially in predicting future returns and have different economic determinants, namely, imbalance in the supply and demand and volatility risk in financial markets.
Article
This paper investigates commodity futures momentums with various ranking periods on a weekly basis. Unlike in equity markets, strong short-term momentum, instead of short-term reversal, is observed in commodity futures markets. The weekly momentum remains highly significant, even after various factors are controlled for, such as carry, equity momentum, or hedging pressure. Our results suggest that the anomalous returns from the traditional 12-month momentum strategy in the commodity futures markets mainly stem from the strong predictability of the past week's return. Lastly, we suggest that the weekly momentum is closely related to speculative activity in the commodity futures market.
Article
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In this article the authors examine the diversification benefits of adding managed and unmanaged commodity futures to a traditional portfolio that consists of U.S. equities, foreign equities, corporate bonds, and Treasury bills From 1973 through 1999. Consistent with previous evidence, they find that commodity futures substantially enhance portfolio performance for investors, and managed futures provide the greatest benefit. They show that the benefits of adding commodity futures (both managed and unmanaged) accrue almost exclusively when the Federal Reserve is following a restrictive monetary policy. The results suggest that metals and agricultural futures contracts offer the most diversification benefits for investors. Overall, the findings indicate that investors should gauge monetary conditions to determine the optimal allocation of commodity futures within a portfolio, and whether a short or a long position should be established in a particular type of contract.
Article
Full-text available
This paper examines the profitability of momentum strategies implemented on international stock market indices. Our results indicate statiscally significant evidence of momentum profits. The momentum profits arise mainly from time-series predictability in stock market indices very little profit comes from predictability in the currency markets. We also find higher profits for momentum portfolios implemented on markets with higher volume in the previous period, indicating that return continuation is stronger following an increase in trading volume. This result confirms the informational role of volume and its applicability in technical analysis.
Article
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Portfolio strategies that buy stocks with high returns over the previous 3–12 months and sell stocks with low returns over this same time period perform well over the following 12 months. A recent article by Conrad and Kaul (1998) presents striking evidence suggesting that the momentum profits are attributable to cross-sectional differences in expected returns rather than to any time-series dependence in returns. This article shows that Conrad and Kaul reach this conclusion because they do not take into account the small sample biases in their tests and bootstrap experiments. Our unbiased empirical tests indicate that cross-sectional differences in expected returns explain very little, if any, of the momentum profits.
Article
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.
Article
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
Article
Investors face numerous challenges when seeking to estimate the prospective performance of a long-only investment in commodity futures. For instance, historically, the average annualized excess return of the average individual commodity futures has been approximately zero and commodity futures returns have been largely uncorrelated with one another. The prospective annualized excess return of a rebalanced portfolio of commodity futures, however, can be "equity-like." Some security characteristics (such as the term structure of futures prices) and some portfolio strategies have historically been rewarded with above-average returns. It is important to avoid naive extrapolation of historical returns and to strike a balance between dependable sources of return and possible sources of return.
Article
A major issue in recent years is the role that large, managed futures funds and pools play in futures markets. Many market participants argue that managed futures trading increases price volatility due to the size of managed futures trading and reliance on positive feedback trading systems. The purpose of this study is to provide new evidence on the impact of managed futures trading on futures price volatility. A unique data set on managed futures trading is analyzed for the period 1 December 1988 through 31 March 1989. The data set includes the daily trading volume of large commodity pools for 36 different futures markets. Regression results are unequivocal with respect to the impact of commodity pool trading on futures price volatility. For the 72 estimated regressions (two for each market), the coefficient on commodity pool trading volume is significantly different from zero in only four cases. These results constitute strong evidence that, at least for this sample period, commodity pool trading is not associated with increases in futures price volatility.
Article
We document that instrumental variables known to possess forecast power in equity and bond markets (Treasury bill yields, equity dividend yields, and the ‘junk’ bond premium) also possess forecast power for prices in agricultural, metals, and currency futures markets. The pattern of forecastability in futures is consistent with economic equilibrium as embodied by a two-‘latent-variable’ model. We test whether the latent variables that explain these futures returns coincide with latent variables that explain returns on size-ranked equity portfolios. This hypothesis is rejected, suggesting that futures are subject to different sources of priced risk than are equities.
Article
Recent research documents that commodities are good diversifiers in traditional investment portfolios: overall portfolio risk is reduced while less than proportional return is sacrificed. These studies generally find a relatively high volatility in commodity returns, which implies a huge potential for tactical strategies. In this paper we investigate timing strategies with commodity futures using factors directly related to the stance of the business cycle, the monetary environment and the sentiment of the market. We use a dynamic model selection procedure in the spirit of the recursive modeling approach of Pesaran and Timmermann [1995]. However, instead of using in-sample model selection criteria, we build on the extensions of Bauer, Derwall and Molenaar [2004] by introducing an out-of-sample model training period to select optimal models. The best models from this training period are used to generate forecasts in a subsequent trading period. Our results show that the variation in commodity future returns is sufficiently predictable to be exploited by a realistic timing strategy.
Article
Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
Article
Using the Lagrange multiplier procedure or score test on the Pearson family of distributions we obtain tests for normality of observations and regression disturbances. The tests suggested have optimum asymptotic power properties and good finite sample performance. Due to their simplicity they should prove to be useful tools in statistical analysis. /// En utilisant la procédure du multiplicateur de Lagrange, ou le score test, sur les distributions du genre Pearson, on obtient des tests de normalité pour les observations et les résidus de régression. Les tests suggérés ont des proprietés optimales asymptotiques et des bonnes performances pour des échantillons finis. A cause de leur simplicité ces tests doivent s'avérer comme des instruments utiles dans l'analyse statistique.
Article
A major issue in recent years is the role that large, managed futures funds and pools play in futures markets. Many market participants argue that managed futures trading increases price volatility due to the size of managed futures trading and reliance on positive feedback trading systems. The purpose of this study is to provide new evidence on the impact of managed futures trading on futures price volatility. A unique data set on managed futures trading is analyzed for the period 1 December 1988 through 31 March 1989. The data set includes the daily trading volume of large commodity pools for 36 different futures markets. Regression results are unequivocal with respect to the impact of commodity pool trading on futures price volatility. For the 72 estimated regressions (two for each market), the coefficient on commodity pool trading volume is significantly different from zero in only four cases. These results constitute strong evidence that, at least for this sample period, commodity pool trading is not associated with increases in futures price volatility. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 759–776, 1999
Article
Traditionally, constant expected return asset pricing models are used to assess the presence of a futures risk premium and the validity of the normal backwardation theory. In the light of recent evidence regarding the presence of time variation in expected futures returns, such an approach may lead to incorrect inferences on the applicability of the Keynesian hypothesis. This article therefore allows for variation through time in expected futures returns and offers some strong evidence in favor of the normal backwardation and contango theories. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:803–821, 2000
Article
In frictionless and rational markets, perfect substitutes must have the same price. In markets with trading costs, however, price differences may be as large as the costs of executing the arbitrage between markets. Moreover, if trading costs differ, trading activity will tend to be concentrated in the lowest-cost market. This study tests the differential trading cost hypothesis by examining the rate at which new information is incorporated in stock, index futures, and index option prices. The lead/lag return relations among markets are consistent with their relative trading costs. Prices in the index derivative markets appear to lead prices in the stock market. At the same time, index futures prices tend to lead index option prices, and the prices of index calls and index puts move together. The trading cost hypothesis reconciles the disparity found between the temporal relation in the stock index/index derivative markets versus the stock/stock option markets.
Article
We use the standard contrarian portfolio approach to examine short-horizon return predictability in 24 US futures markets. We find strong evidence of weekly return reversals, similar to the findings from equity market studies. When interacting between past returns and lagged changes in trading activity (volume and/or open interest), we find that the profits to contrarian portfolio strategies are, on average, positively associated with lagged changes in trading volume, but negatively related to lagged changes in open interest. We also show that futures return predictability is more pronounced if interacting between past returns and lagged changes in both volume and open interest. Our results suggest that futures market overreaction exists, and both past prices and trading activity contain useful information about future market movements. These findings have implications for futures market efficiency and are useful for futures market participants, particularly commodity pool operators.
Article
This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
Article
Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers). We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution. In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.
Article
The long-standing controversy over whether speculators in a futures market earn a risk premium is analyzed within the context of the capital asset pricing model recently developed by Sharpe, Lintner, and others. Under that approach the risk premium required on a futures contract should depend not on the variability of prices but on the extent to which the variations in prices are systematically related to variations in the return on total wealth. The systematic risk was estimated for a sample of wheat, corn, and soybean futures contracts over the period 1952 to 1967 and found to be close to zero in all three cases. Average realized holding period returns on the contracts over the same period were close to zero.
Article
I examine the uniformity of risk pricing in futures and asset markets. Tests against a general alternative do not reject complete integration of futures and asset markets. As predicted, estimates of the “zero-beta” rate for futures are close to zero, and premiums for systematic risk do not differ significantly across assets and futures. There is, however, evidence consistent with a specific alternative model presented by Hirshleifer (1988). Returns in foreign currency and agricultural futures vary with the net holdings of hedgers, after controlling for systematic risk. These results imply a degree of market segmentation and support hedging pressure as a determinant of futures premiums.
Article
In this article we use a single unifying framework to analyze the sources of profits to a wide spectrum of return-based trading strategies implemented in the literature. We show that less than 50% of the 120 strategies implemented in the article yield statistically significant profits and, unconditionally, momentum and contrarian strategies are equally likely to be successful. However, when we condition on the return horizon (short, medium, or long) of the strategy, or the time period during which it is implemented, two patterns emerge. A momentum strategy is usually profitable at the medium (3- to 12-months) horizon, while a contrarian strategy nets statistically significant profits at long horizons, but only during the 1926–1947 subperiod. More importantly, our results show that the cross-sectional variation in the mean returns of individual securities included in these strategies play an important role in their profitability. The cross-sectional variation can potentially account for the profitability of momentum strategies and it is also responsible for attenuating the profits from price reversals to long-horizon contrarian strategies.
Article
This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor prior-period performance measures. A conditional approach, using time-varying measures of risk and abnormal performance, is better able to detect this persistence and to predict the future performance of the funds than are traditional methods. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Article
Historically, commodity futures have had excess returns similar to those of equities. But what should we expect in the future? The usual risk factors are unable to explain the time-series variation in excess returns. In addition, our evidence suggests that commodity futures are an inconsistent, if not tenuous, hedge against unexpected inflation. Further, the historically high average returns to a commodity futures portfolio are largely driven by the choice of weighting schemes. Indeed, an equally weighted long-only portfolio of commodity futures returns has approximately a zero excess return over the past 25 years. Our portfolio analysis suggests that the a long-only strategic allocation to commodities as a general asset class is a bet on the future term structure of commodity prices, in general, and on specific portfolio weighting schemes, in particular. In contrast, we provide evidence that there are distinct benefits to an asset allocation overlay that tactically allocates using commodity futures exposures. We examine three trading strategies that use both momentum and the term structure of futures prices. We find that the tactical strategies provide higher average returns and lower risk than a long-only commodity futures exposure.
Article
It is well established that recent prior winner and loser stocks exhibit return continuation; a momentum strategy of buying recent winners and shorting recent losers appears profitable in the post 1945 era. In contrast, the risk exposure of such a strategy has not been well understood; the strategy's unconditional average risk exposure can be deceptive. The stock selection method of a momentum strategy guarantees that large and time varying factor exposured will be borne in accordance with the performance of the common risk factors during the periods in which stocks were ranked to determine their winner/losed status.
Article
When coupled with a stock's current price, a readily available piece of information-the 52-week high price-explains a large portion of the profits from momentum investing. Nearness to the 52-week high dominates and improves upon the forecasting power of past returns (both individual and industry returns) for future returns. Future returns forecast using the 52-week high do not reverse in the long run. These results indicate that short-term momentum and long-term reversals are largely separate phenomena, which presents a challenge to current theory that models these aspects of security returns as integrated components of the market's response to news. Copyright 2004 by The American Finance Association.
Article
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information. Copyright 1996 by American Finance Association.
Article
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that hav e performed poorly in the past generate significant positive returns o ver three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delay ed stock price reactions to common factors. However, part of the abnorm al returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented. Copyright 1993 by American Finance Association.
Article
Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
Article
Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.
Article
A growing number of researchers argue that time-series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time-varying expected returns as an explanation for momentum payoffs. Copyright The American Finance Association 2002.
Article
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Copyright The American Finance Association 2001.
Article
This paper documents a strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly. Specifically, momentum investment strategies, which buy past winning stocks and sell past losing stocks, are significantly less profitable once we control for industry momentum. By contrast, industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book-to-market equity, individual stock momentum, the cross-sectional dispersion in mean returns, and potential microstructure influences. Copyright The American Finance Association 1999.
Article
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the capital asset pricing model, (CAPM), they are called anomalies. The authors find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Their results are consistent with rational intertemporal CAPM or arbitrage pricing theory asset pricing but the authors also consider irrational pricing and data problems as possible explanations. Copyright 1996 by American Finance Association.
Article
In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
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This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
Article
We test overreaction theories of short-run momentum and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93%, whereas the mean profit following negative market returns is - 0.37%. The up-market momentum reverses in the long-run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns. Copyright 2004 by The American Finance Association.