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Momentum Strategies in Commodity Futures Markets

Last Updated on 10 February, 2024 by Rejaul Karim

Momentum Strategies in Commodity Futures Markets” by Joëlle Miffre of Audencia Business School and Georgios Rallis of City University of London delves into the intriguing world of commodity futures markets, exploring the presence of short-term continuation and long-term reversal in prices.

The paper presents findings that challenge conventional trading wisdom. Contrarian strategies are shown to be ineffective, while the study identifies 13 profitable momentum strategies that yield an impressive average return of 9.38% per year. A closer examination of the long-short portfolios reveals the strategies involve buying backwardated contracts and selling contangoed contracts.

Furthermore, the correlation between these momentum returns and traditional asset class returns is found to be low, making commodity-based relative-strength portfolios valuable additions to well-diversified investment portfolios.

With its groundbreaking insights and potential for significant financial gains, this research sheds new light on momentum strategies in commodity futures markets.

Abstract Of Paper

The article tests for the presence of short-term continuation and long-term reversal in commodity futures prices. While contrarian strategies do not work, the article identifies 13 profitable momentum strategies that generate 9.38% average return a year. A closer analysis of the constituents of the long-short portfolios reveals that the momentum strategies buy backwardated contracts and sell contangoed contracts. The correlation between the momentum returns and the returns of traditional asset classes is also found to be low, making the commodity-based relative-strength portfolios excellent candidates for inclusion in well-diversified portfolios.

Original paper – Download PDF

Here you can download the PDF and original paper of Momentum Strategies in Commodity Futures Markets.

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Author

Joëlle Miffre
Audencia Business School

Georgios Rallis
City University of London – Sir John Cass Business School

Conclusion

In conclusion, the study has provided valuable insights into the dynamics of commodity futures markets. The identification of 13 profitable momentum strategies with an average annual return of 9.38% challenges traditional trading wisdom and opens new avenues for investors.

The findings, which highlight the effectiveness of momentum strategies in commodity trading, offer significant potential for financial gains. Additionally, the analysis of long-short portfolios, revealing the preference for buying backwardated contracts and selling contangoed contracts, provides practical guidance for implementation.

Furthermore, the low correlation between momentum returns and traditional asset class returns establishes commodity-based relative-strength portfolios as compelling additions to well-diversified investment portfolios.

This research not only contributes to the existing body of knowledge in finance but also offers valuable implications for practitioners and investors aiming to optimize their portfolios in commodity futures markets.

Related Reading:

Tactical Asset Allocation to Gold

Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals

FAQ

Q1: What is the main focus of the research paper “Momentum Strategies in Commodity Futures Markets”?

A1: The main focus of the research paper is to investigate the presence of short-term continuation and long-term reversal in commodity futures prices. The study explores the effectiveness of momentum and contrarian trading strategies in commodity futures markets.

Q2: What is the correlation between momentum returns in commodity futures markets and returns of traditional asset classes?

A2: The study finds that the correlation between momentum returns in commodity futures markets and returns of traditional asset classes is low. This suggests that commodity-based relative-strength portfolios, driven by momentum strategies, can serve as valuable additions to well-diversified investment portfolios.

Q3: What is the significance of the research’s findings for investors and practitioners?

A3: The research findings challenge conventional trading wisdom, offering new perspectives on the effectiveness of momentum and contrarian strategies in commodity futures markets. For investors and practitioners, the identification of profitable momentum strategies and insights into the contracts involved provide actionable guidance for optimizing portfolios in commodity trading. Additionally, the low correlation with traditional asset classes enhances the appeal of commodity-based relative-strength portfolios for diversification.

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