Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Basis-momentum

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Basis-momentum” introduces a compelling and innovative return predictor, termed basis-momentum, which is intricately linked to the slope and curvature of the futures term structure. Authored by Martijn Boons and Melissa Porras Prado, the study asserts the superior predictive prowess of basis-momentum in forecasting commodity spot and term premiums, both across time series and in the cross-section.

Notably, exposure to basis-momentum emerges as a vital pricing factor among commodity-sorted portfolios and individual commodities, challenging conventional benchmark characteristics.

The authors substantiate their argument by delineating the concept of basis-momentum as a reflection of imbalances in futures contract supply and demand, a compensation for priced risk, and emphasize its divergence from explanations rooted in storage, inventory, and hedging pressure.

This introduction sets the stage for a groundbreaking exploration into the nuanced intricacies of commodity futures returns, offering fresh perspectives on risk and pricing mechanisms.

Abstract Of Paper

We introduce a return predictor related to the slope and curvature of the futures term structure: basis-momentum. Basis-momentum strongly outperforms benchmark characteristics in predicting commodity spot and term premiums in the time series and cross section. Exposure to basis-momentum is priced among commodity-sorted portfolios and individual commodities. We argue that basis-momentum captures imbalances in the supply and demand of futures contracts that materialize when the market-clearing ability of speculators and intermediaries is impaired, and that basis-momentum represents compensation for priced risk. Our findings are inconsistent with alternative explanations based on storage, inventory, and hedging pressure.

Original paper – Download PDF

Here you can download the PDF and original paper of Basis-momentum.

(An option to download will come shortly)

Author

Martijn Boons
Tilburg University

Melissa Porras Prado
Nova School of Business and Economics; Centre for Economic Policy Research (CEPR)

Conclusion

The research on “Basis-momentum” represents a significant advancement in understanding commodity futures returns, as it introduces a powerful return predictor linked to the term structure’s slope and curvature.

The study’s findings underscore the remarkable predictive superiority of basis-momentum over conventional benchmark characteristics in forecasting commodity spot and term premiums, both across time series and in the cross-section.

Furthermore, the demonstration of basis-momentum’s pricing relevance among commodity-sorted portfolios and individual commodities reshapes prevailing perceptions of risk assessment and pricing mechanisms. By attributing the concept of basis-momentum to imbalances in futures contract supply and demand, as well as viewing it as compensation for priced risk, the authors offer a compelling revision of existing explanations centered on storage, inventory, and hedging pressure.

This conclusion marks a pivotal contribution to the understanding of commodity markets, offering a paradigm shift in evaluating risk and return dynamics in this domain.

Related Reading:

What Drives Informed Trading Before Public Releases? Evidence from Natural Gas Inventory Announcements

Long-Run Reversal in Commodity Returns: Insights from Seven Centuries of Evidence

FAQ

What is the main focus of the paper “Basis-momentum”?

The main focus of the paper “Basis-momentum” is to introduce and explore a return predictor called basis-momentum. This predictor is intricately linked to the slope and curvature of the futures term structure. The paper aims to demonstrate the superior predictive ability of basis-momentum in forecasting commodity spot and term premiums, both across time series and in the cross-section.

How does basis-momentum perform compared to benchmark characteristics in predicting commodity returns?

Basis-momentum significantly outperforms benchmark characteristics in predicting commodity spot and term premiums. The paper highlights that basis-momentum exhibits strong predictive power, surpassing conventional benchmark characteristics, and performs well both over time and across different commodities.

How is exposure to basis-momentum priced among commodity-sorted portfolios and individual commodities?

The paper asserts that exposure to basis-momentum is priced among commodity-sorted portfolios and individual commodities. This means that basis-momentum is considered a relevant factor influencing the pricing of commodity portfolios and specific commodities. The pricing relevance of basis-momentum suggests its importance in understanding risk and return dynamics in the commodity market.

Check Our Academic Scholarly Database List For Traders here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password