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Strategies Based on Momentum and Term Structure in Financialized Commodity Markets

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper, “Strategies Based on Momentum and Term Structure in Financialized Commodity Markets,” authored by Adam Zaremba, presents an in-depth exploration into the impact of financialization on the profitability of momentum and term structure strategies in commodity markets.

With a comprehensive analysis spanning the period of 1986–2013 and covering 26 commodities, the study scrutinizes portfolios based on non-commercial traders’ participation, historical returns, and term spreads, providing a compelling investigation into the dynamics of these strategies.

Notably, the paper unveils fresh evidence validating the viability of momentum and term structure strategies in commodity markets, shedding light on the significantly higher performance of term structure strategies in non-financialized markets.

Moreover, it elucidates the adverse effects of market financialization on momentum profits, offering valuable insights crucial for tactical and strategic asset allocation in commodity markets.

This pioneering research not only enhances our understanding of commodity market dynamics but also underscores the strategic considerations imperative for investors implementing momentum or term structure-based strategies.

Abstract Of Paper

The aim of this paper is to investigate the impact of the financialization of commodity markets on the profitability of strategies based on momentum and term structure. The performance of an array of portfolios from double-sorts on non-commercial traders’ participation, historical returns and term spreads are tested against a risk model. The analysis covers the listing of 26 commodities in the period 1986–2013. First and foremost, the paper provides a fresh evidence for the validity of strategies based on momentum and term structure investing in commodity markets. Secondly, it proves that term structure strategies generate significantly higher performance results in non-financialized markets. Moreover, it supports the thesis that market financialization adversely affects momentum profits. The results are important in terms of tactical and strategic asset allocation in commodity markets. They imply that investors who implement momentum or term structure based strategies should also consider the composition of market participants.

Original paper – Download PDF

Here you can download the PDF and original paper of Strategies Based on Momentum and Term Structure in Financialized Commodity Markets.

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Author

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

Conclusion

In conclusion, the profound insights unveiled in “Strategies Based on Momentum and Term Structure in Financialized Commodity Markets” by Adam Zaremba cast a compelling light on the impact of financialization on the profitability of momentum and term structure strategies.

The meticulous analysis spanning 1986–2013 and encompassing 26 commodities not only reaffirms the validity of these strategies but also underscores the markedly superior performance of term structure strategies in non-financialized markets. Importantly, the research provides empirical validation of the adverse effects of market financialization on momentum profits, illuminating the intricate interplay between financialization and strategy performance.

These findings precipitate significant implications for tactical and strategic asset allocation in commodity markets, emphasizing the critical consideration of market participant composition for investors implementing momentum or term structure-based strategies.

With these revelations, the study not only augments our comprehension of commodity market dynamics but also furnishes pivotal guidance for astute decision-making in the dynamic landscape of commodity investing.

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FAQ

Q1: What is the primary focus of the research on “Strategies Based on Momentum and Term Structure in Financialized Commodity Markets,” and what does it aim to investigate?

A1: The primary focus of the research is to investigate the impact of financialization on the profitability of strategies based on momentum and term structure in commodity markets. The study aims to analyze the performance of portfolios derived from double-sorts on non-commercial traders’ participation, historical returns, and term spreads. By scrutinizing the period of 1986–2013 and covering 26 commodities, the research seeks to provide insights into how financialization influences the effectiveness of momentum and term structure strategies in commodity markets.

Q2: What key findings does the research reveal regarding the viability of momentum and term structure strategies in commodity markets?

A2: The research reveals fresh evidence supporting the viability of strategies based on momentum and term structure investing in commodity markets. It establishes the effectiveness of these strategies by analyzing portfolios across different sorting criteria. Additionally, the study highlights that term structure strategies demonstrate significantly higher performance results in non-financialized markets. This implies that the dynamics of financialization play a role in the relative success of different strategies in commodity markets.

Q3: How does the research contribute to understanding the impact of financialization on momentum profits in commodity markets?

A3: The research contributes to understanding the impact of financialization on momentum profits by providing empirical support for the thesis that market financialization adversely affects momentum profits. It sheds light on the complex relationship between the financialization of commodity markets and the profitability of momentum strategies. This insight is crucial for investors and practitioners in navigating the changing landscape of commodity markets and making informed decisions about the implementation of momentum-based strategies.

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