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

Last Updated on 10 February, 2024 by Rejaul Karim

The groundbreaking study, “Long-Run Reversal in Commodity Returns: Insights from Seven Centuries of Evidence,” offers an unparalleled exploration spanning over seven centuries, providing invaluable insights into the enduring phenomenon of long-run reversal in commodity returns. Authored by Adam Zaremba, Robert J. Bianchi, and Mateusz Mikutowski, this extensive research delves into the price behavior of 52 diverse agricultural, industrial, and energy commodities from 1265 to 2017.

The findings are revelatory, uncovering a robust and pervasive long-run reversal effect, wherein returns from the previous one to three years inversely predict subsequent performance across returns.

Notably, this effect withstands rigorous subsample and subperiod analyses and appears independent of statistical biases, extreme events, or macroeconomic risks. The study’s findings bolster the argument that long-term reversal stems from supply and demand adjustments following price fluctuations, emphasizing the heightened prevalence of this phenomenon in more volatile commodities and during periods of elevated return dispersion.

This introduction sets the stage for an in-depth journey through centuries of commodity market dynamics, offering a fresh lens through which to comprehend the intricate interplay of historical returns, mean reversion, and trading strategies.

Abstract Of Paper

We perform the longest study of long-run reversal in commodity returns. Using a unique dataset of prices of 52 agricultural, industrial, and energy commodities, we examine the price behavior for the years 1265 to 2017. The findings reveal a strong and robust long-run reversal effect. The returns of the past one to three years negatively predict subsequent performance in the cross-section of returns. The effect is robust to extensive subsample and subperiod analysis, and not driven by statistical biases, extreme events, or macroeconomic risks. Our findings support the explanation that the long-term reversal originates from supply and demand adjustments following price changes. Finally, the phenomenon is elevated in more volatile commodities and in periods of high return dispersion.

Original paper – Download PDF

Here you can download the PDF and original paper of Long-Run Reversal in Commodity Returns: Insights from Seven Centuries of Evidence.

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Author

Adam Zaremba
Montpellier Business School; Poznan University of Economics and Business

Robert J. Bianchi
Griffith University; Griffith University

Mateusz Mikutowski
Poznan University of Economics and Business

Conclusion

In conclusion, the extensive investigation spanning seven centuries of commodity market dynamics has unearthed compelling evidence of a robust long-run reversal effect across a diverse array of agricultural, industrial, and energy commodities.

The findings underscore the enduring nature of this phenomenon, with returns from the past one to three years exhibiting a negative predictive influence on subsequent performance within the returns cross-section.

Crucially, this effect has withstood rigorous scrutiny through extensive subsample and subperiod analyses, demonstrating resilience against statistical biases, extreme events, and macroeconomic risks.

Strikingly, the study’s findings bolster the premise that long-term reversal is intrinsically linked to supply and demand adjustments following price shifts, resonating with heightened significance in more volatile commodities and during periods characterized by elevated return dispersion.

This culmination of insights offers a panoramic view of historical returns, mean reversion, and trading strategies, enriching our comprehension of enduring patterns within commodity markets.

Related Reading:

Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals

Exploiting Commodity Momentum Along the Futures Curves

FAQ

What is the main focus of the paper “Long-Run Reversal in Commodity Returns: Insights from Seven Centuries of Evidence”?

The main focus of the paper is to conduct an extensive study on the long-run reversal effect in commodity returns. The authors analyze the price behavior of 52 agricultural, industrial, and energy commodities over an unprecedented time span from 1265 to 2017, aiming to uncover patterns of long-run reversal in historical commodity returns.

What does the study reveal about the long-run reversal effect in commodity returns?

The study reveals a strong and robust long-run reversal effect in commodity returns. Specifically, returns from the past one to three years negatively predict subsequent performance within the cross-section of returns. This finding suggests that there is a persistent pattern of mean reversion in commodity returns over an extended historical period.

How does the long-run reversal effect withstand rigorous analysis in the study?

The long-run reversal effect withstands rigorous analysis through extensive subsample and subperiod analyses. The authors conduct thorough examinations to ensure the robustness of their findings, ruling out potential influences from statistical biases, extreme events, or macroeconomic risks. The resilience of the long-run reversal effect across various subsets of data strengthens the credibility of the observed phenomenon.

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