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

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper, “Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals,” delves into a comprehensive analysis of the interplay between momentum and term structure signals in crafting effective trading strategies within commodity futures markets.

Authored by Ana-Maria Fuertes, Joëlle Miffre, and Georgios Rallis, this study reveals the individual profitability of momentum and term structure strategies, boasting annualized alphas of 10.14% and 12.66% respectively.

However, it is the innovative double-sort strategy, yielding an exceptional abnormal return of 21.02%, that stands out as a superior performer by capitalizing on both momentum and term structure signals. This unique approach not only demonstrates robustness against transaction costs and varying risk-return trade-off specifications but also serves as a compelling tool for portfolio diversification.

In light of its distinct performance and resilience, the double-sort strategy presents an intriguing avenue for exploring effective tactical allocation in commodity futures markets.

Abstract Of Paper

This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14% and 12.66% respectively, the momentum and term structure strategies appear profitable when implemented individually. With an abnormal return of 21.02%, a novel double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies. This double-sort strategy can additionally be utilized as a portfolio diversification tool. Interestingly, the abnormal performance of the double-sort portfolios cannot be explained by a lack of liquidity or data mining and is robust to transaction costs and to different specifications of the risk-return trade-off.

Original paper – Download PDF

Here you can download the PDF and original paper of Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals.

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Author

Ana-Maria Fuertes
Bayes Business School, City, University of London

Joëlle Miffre
Audencia Business School

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

Conclusion

In conclusion, the study on Tactical Allocation in Commodity Futures Markets has provided valuable insights into the efficacy of trading strategies based on momentum and term structure signals. The individual profitability of the momentum and term structure strategies, with annualized alphas of 10.14% and 12.66% respectively, underscores their inherent potential.

However, it is the remarkable abnormal return of 21.02% generated by the novel double-sort strategy that truly highlights its superiority over single-sort approaches. This innovative strategy not only outperforms its counterparts but also serves as a potent tool for portfolio diversification.

Notably, the exceptional performance of the double-sort portfolios transcends explanations based on liquidity, data mining, or transaction costs, emphasizing its robustness and potential for effective tactical allocation within commodity futures markets.

Related Reading:

Exploiting Commodity Momentum Along the Futures Curves

Chrilly’s Toolbox of Energy Futures Trading

FAQ

What is the main focus of the research paper on Tactical Allocation in Commodity Futures Markets?

The main focus of the research paper is to explore the effectiveness of trading strategies in commodity futures markets by examining the combined role of momentum and term structure signals. The authors aim to assess the profitability of individual strategies based on momentum and term structure, as well as introduce a novel double-sort strategy that combines both signals for enhanced performance.

What are the key findings regarding individual trading strategies based on momentum and term structure signals?

The study finds that individual trading strategies based on momentum and term structure signals exhibit significant annualized alphas. Specifically, the momentum strategy shows an annualized alpha of 10.14%, while the term structure strategy demonstrates an annualized alpha of 12.66%. This highlights the inherent profitability of both strategies when implemented individually.

What sets the double-sort strategy apart, and what is its abnormal return?

The double-sort strategy, which combines momentum and term structure signals, stands out for its exceptional performance. It generates an abnormal return of 21.02%, surpassing the returns achieved by the individual strategies. This innovative approach involves sorting assets based on both momentum and term structure, showcasing its effectiveness in capturing market dynamics and producing superior returns.

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