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Are There Exploitable Trends in Commodity Future Prices?

Last Updated on 10 February, 2024 by Rejaul Karim

In their paper “Are There Exploitable Trends in Commodity Future Prices?” Yufeng Han and Ting Hu delve into the intriguing question of whether moving average timing strategies applied to portfolios of commodity futures can outperform the traditional buy-and-hold strategy.

Their findings provide compelling evidence that the moving average timing strategy consistently generates superior performance, even after factoring in transaction costs and considering various market conditions.

The robustness of this outperformance, particularly during recessions and periods of high investor sentiment, underscores the potential for successful timing of the market portfolio in commodity futures trading.

With a focus on the interplay between moving averages, timing, and predictability in commodity futures, this study offers valuable insights into exploitable trends in these markets, laying the groundwork for deeper exploration.

Abstract Of Paper

We provide evidence that a simple moving average timing strategy, when applied to portfolios of commodity futures, can generate superior performance to the buy-and-hold strategy. The outperformance is very robust. It can survive the transaction costs in the futures markets, it is not concentrated in a particular subperiod, and it is robust to short-sale constraint, alternative specifications of the moving average lag length, and alternative construction of the continuous time-series of futures prices. The outperformance of the timing strategy is stronger during recession and with high investor sentiment, which likely proxies for high real interest rates. Finally, we confirm that the outperformance of the moving average timing strategy in the commodity futures comes from the successful timing of the market portfolio.

Original paper – Download PDF

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Author

Yufeng Han
University of North Carolina (UNC) at Charlotte – Finance

Ting Hu
Wuhan University – School of Economics and Management

Conclusion

In conclusion, the study “Are There Exploitable Trends in Commodity Future Prices?” by Yufeng Han and Ting Hu offers compelling evidence supporting the effectiveness of a simple moving average timing strategy applied to portfolios of commodity futures.

The demonstrated superior performance of this strategy, even in the presence of transaction costs and across various market conditions, underscores its robustness and potential for exploitation.

The research further establishes the timing strategy’s increased outperformance during recessionary periods and in the presence of elevated investor sentiment, indicative of high real interest rates.

Notably, the success of the moving average timing strategy in commodity futures is attributed to its adept timing of the market portfolio. These findings illuminate promising avenues for capitalizing on exploitable trends in commodity future prices, enriching the understanding of market dynamics and informing strategic decision-making for market participants.

Related Reading:

Commodity Option Implied Volatilities and the Expected Futures Returns

Commodity Strategies Based on Momentum, Term Structure and Idiosyncratic Volatility

FAQ

What is the main focus of the paper “Are There Exploitable Trends in Commodity Future Prices?”

The main focus of the paper is to investigate whether a simple moving average timing strategy, when applied to portfolios of commodity futures, can generate superior performance compared to the traditional buy-and-hold strategy. The authors aim to provide evidence regarding the effectiveness of timing strategies in commodity futures trading.

What is the key finding regarding the moving average timing strategy?

The key finding is that the moving average timing strategy consistently generates superior performance, outperforming the traditional buy-and-hold strategy. This outperformance is observed even after considering transaction costs, different market conditions, and alternative specifications. The robustness of the strategy’s success highlights its potential for exploitation in commodity futures trading.

How does the study assess the robustness of the moving average timing strategy’s outperformance?

The study assesses the robustness of the moving average timing strategy’s outperformance by considering various factors. It examines the strategy’s performance in the presence of transaction costs, across different subperiods, under short-sale constraints, with alternative specifications of the moving average lag length, and with alternative constructions of the continuous time-series of futures prices. The consistent outperformance across these considerations contributes to the strategy’s robustness.

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