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Is Idiosyncratic Asymmetry Priced in Commodity Futures?

Last Updated on 10 February, 2024 by Rejaul Karim

Titled “Idiosyncratic Asymmetry Priced in Commodity Futures?“, this study delves into a thought-provoking investigation penned by Yufeng Han, Xuan Mo, Zhi Su, and Yifeng Zhu from esteemed academic institutions.

The paper introduces a recently devised asymmetry measure, IE (Jiang, Wu, Zhou, and Zhu, 2020), to evaluate the idiosyncratic asymmetry of commodity futures returns. The findings provide compelling evidence of the negative and significant predictive relationship between idiosyncratic asymmetry and commodity futures returns cross-sectionally.

Notably, the study also divulges the development of a long/short trading strategy anchored in idiosyncratic asymmetry, yielding substantial abnormal returns over a noteworthy 12-month period which remain unexplained by conventional risk factors.

This exploration highlights the emergence of idiosyncratic asymmetry as a substantial priced factor in commodity futures, thus challenging existing perceptions and opening new vistas for comprehension within this domain.

Abstract Of Paper

In this paper, we use a recently introduced asymmetry measure, IE (Jiang, Wu, Zhou, and Zhu, 2020), to measure the idiosyncratic asymmetry of commodity futures returns and find that idiosyncratic asymmetry negatively and significantly predicts commodity futures returns cross-sectionally. Furthermore, we find that a long/short trading strategy based on the idiosyncratic asymmetry generates significant abnormal returns, which cannot be explained by the traditional risk factors in commodity futures and persists up to 12 months. Moreover, idiosyncratic asymmetry appears to be a priced factor in the commodity futures with significant risk premium. Finally, we confirm that IE is better at capturing the pricing effect of idiosyncratic asymmetry than the traditional skewness measure.

Original paper – Download PDF

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Author

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

Xuan Mo
Central University of Finance and Economics

Zhi Su
Central University of Finance and Economics (CUFE)

Yifeng Zhu
School of Finance, Central University of Finance and Economics

Conclusion

The investigation into the pricing implications of idiosyncratic asymmetry in commodity futures culminates in revealing insights. Findings from the utilization of the asymmetry measure, IE, shed light on the significant and negative predictive relationship between idiosyncratic asymmetry and commodity futures returns.

Notably, the development of a long/short trading strategy grounded in idiosyncratic asymmetry yields compelling abnormal returns over a substantial 12-month period, evading explanations by conventional risk factors.

It is paramount to acknowledge the emergence of idiosyncratic asymmetry as a substantial priced factor in commodity futures, marked by a noteworthy risk premium.

Moreover, the affirmation that IE surpasses traditional skewness measures in capturing the pricing effect of idiosyncratic asymmetry underscores a crucial turning point in comprehending the complexities of this particular market.

Related Reading:

The Skewness of Commodity Futures Returns

Modeling, Forecasting and Trading the Crude Oil Term Structure

FAQ

What is the main focus of the paper “Is Idiosyncratic Asymmetry Priced in Commodity Futures?”

The main focus of the paper is to investigate the pricing implications of idiosyncratic asymmetry in commodity futures. The study employs a recently introduced asymmetry measure, IE (Jiang, Wu, Zhou, and Zhu, 2020), to measure the idiosyncratic asymmetry of commodity futures returns. The aim is to understand the predictive relationship between idiosyncratic asymmetry and commodity futures returns, as well as to assess the performance of a trading strategy based on idiosyncratic asymmetry.

What does the paper reveal about the relationship between idiosyncratic asymmetry and commodity futures returns?

The paper reveals a negative and significant predictive relationship between idiosyncratic asymmetry and commodity futures returns cross-sectionally. This suggests that idiosyncratic asymmetry plays a role in influencing the performance of commodity futures and is a factor that can be considered in understanding return dynamics in this market.

What is the key finding regarding the long/short trading strategy based on idiosyncratic asymmetry?

The key finding is that a long/short trading strategy based on idiosyncratic asymmetry generates significant abnormal returns over a substantial 12-month period. Importantly, these abnormal returns cannot be explained by traditional risk factors in commodity futures. This result highlights the potential profitability of a trading strategy that incorporates idiosyncratic asymmetry information.

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