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Idiosyncratic Momentum in Commodity Futures

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Idiosyncratic Momentum in Commodity Futures” authored by Iuliia Shpak, Ben Human, and Andrea Nardon introduces pioneering findings on idiosyncratic momentum within commodity futures. The study illuminates a momentum strategy that constructs portfolios based on commodity-specific returns, yielding compelling investment returns that significantly outperform total return momentum on both absolute and risk-adjusted grounds.

Intriguingly, the research reveals the heightened persistence of idiosyncratic return momentum over longer term horizons, substantiating its statistically significant positive returns over ranking periods of up to 24 months. Delving further, the paper examines a range of commodity-specific and equity market factors, establishing that hedging pressure and term structure serve as sources of risk premium in commodity futures.

Notably, the analysis unveils the fundamental divergence between momentum in commodity futures and equity markets, attributing commodity futures momentum entirely to long-only portfolios and underscoring the substantial outperformance of long-only momentum strategies against passive broad market index investments such as the S&P GSCI.

These insights offer valuable implications for investors and researchers, shedding light on the distinctiveness of idiosyncratic momentum in commodity futures and its potential for enhancing investment strategies.

Abstract Of Paper

This paper provides novel findings on idiosyncratic momentum in commodity futures. Momentum strategy that forms portfolios on the basis of commodity-specific returns delivers compelling investment returns which are substantially more robust and superior to total return momentum on an absolute and risk-adjusted basis. Furthermore, idiosyncratic return momentum is materially more persistent than total return momentum in that it delivers statistically significant positive returns over longer term horizons including ranking periods of up to 24 months. A set of commodity specific and equity markets inspired factors are examined. Notably, the results corroborate that hedging pressure and term structure are sources of risk premium in commodity futures. The analysis in this chapter expose that momentum in commodity futures is fundamentally different to the momentum effect in equity markets. Specifically, momentum in commodity futures is entirely attributed to the momentum effect in long-only portfolios whilst none of the short-only strategies’ returns are either profitable or statistically significant. Lastly, the two types of long-only momentum significantly outperform a passive investing into a broad market index such as S&P GSCI.

Original paper – Download PDF

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Author

Iuliia Shpak
Sarasin & Partners LLP

Ben Human
Sarasin & Partners

Andrea Nardon
Sarasin & Partners LLP

Conclusion

In conclusion, the study “Idiosyncratic Momentum in Commodity Futures” by Iuliia Shpak, Ben Human, and Andrea Nardon presents groundbreaking insights into idiosyncratic momentum within commodity futures. The research demonstrates that a momentum strategy relying on commodity-specific returns generates compelling investment returns, exhibiting remarkable robustness and superiority over total return momentum both in absolute terms and on a risk-adjusted basis.

Moreover, the study highlights the heightened persistence of idiosyncratic return momentum, with statistically significant positive returns observed over extended ranking periods of up to 24 months. Examination of commodity-specific and equity market factors further confirms the role of hedging pressure and term structure as sources of risk premium in commodity futures.

Notably, the research underscores the fundamental disparity between momentum in commodity futures and equity markets, attributing the momentum effect in commodity futures entirely to long-only portfolios and emphasizing the substantial outperformance of long-only momentum strategies compared to passive investments in broad market indices such as the S&P GSCI.

These findings offer valuable implications for investors and researchers, elucidating the distinct nature of idiosyncratic momentum in commodity futures and its potential for enhancing investment strategies.

Related Reading:

The Tactical and Strategic Value of Commodity Futures

The Fundamentals of Commodity Futures Returns

FAQ

What is the main focus of the research paper “Idiosyncratic Momentum in Commodity Futures”?

The main focus of the research paper is on idiosyncratic momentum within commodity futures. The study explores a momentum strategy that constructs portfolios based on commodity-specific returns and analyzes its performance in comparison to total return momentum.

What are the key findings regarding the momentum strategy based on commodity-specific returns?

The key findings indicate that the momentum strategy relying on commodity-specific returns delivers compelling investment returns that are substantially more robust and superior to total return momentum. This outperformance is observed in both absolute terms and on a risk-adjusted basis.

What is highlighted regarding the persistence of idiosyncratic return momentum?

The study reveals that idiosyncratic return momentum is materially more persistent than total return momentum. It demonstrates statistically significant positive returns over longer-term horizons, including ranking periods of up to 24 months.

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