Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

The Skewness of Commodity Futures Returns

Last Updated on 10 February, 2024 by Rejaul Karim

In the research article “The Skewness of Commodity Futures Returns,” a compelling study is presented exploring the intricate relationship between the skewness of commodity futures returns and expected returns.

Authored by Adrian Fernandez-Perez, Bart Frijns, Ana-Maria Fuertes, and Joëlle Miffre from prestigious academic institutions, this investigation delves into a thought-provoking trading strategy based on long positions in commodity futures with the most negative skew and short positions in those with the most positive skew.

Notably, the study unveils significant excess returns generated by this strategy, persisting even after adjusting for exposure to traditional risk factors.

Moreover, the introduction of a tradeable skewness factor not only elucidates the cross-section of commodity futures returns beyond standard risk premia but also sheds light on the impact of skewness on future returns, reflecting investor preferences and selective hedging practices rooted in cumulative prospect theory.

Abstract Of Paper

This article studies the relation between the skewness of commodity futures returns and expected returns. A trading strategy that takes long positions in commodity futures with the most negative skew and shorts those with the most positive skew generates significant excess returns that remain after controlling for exposure to well-known risk factors. A tradeable skewness factor explains the cross-section of commodity futures returns beyond exposures to standard risk premia. The impact that skewness has on future returns is explained by investors’ preferences for skewness under cumulative prospect theory and selective hedging practices.

Original paper – Download PDF

Here you can download the PDF and original paper of The Skewness of Commodity Futures Returns.

(An option to download will come shortly)

Author

Adrian Fernandez-Perez
Auckland University of Technology

Bart Frijns
Open University of the Netherlands – School of Management

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

Joëlle Miffre
Audencia Business School

Conclusion

The research into the skewness of commodity futures returns culminates in a compelling conclusion. The trading strategy built on long positions in commodity futures exhibiting the most negative skew and short positions in those with the most positive skew proves to yield significant excess returns, persisting even after accounting for exposure to conventional risk factors.

Notably, the introduction of a tradeable skewness factor sheds light on the cross-section of commodity futures returns, transcending standard risk premia.

Moreover, the impact of skewness on future returns reveals insights into investors’ preferences under cumulative prospect theory and selective hedging practices.

This study thus underscores the nuanced relationship between skewness and expected returns in commodity futures, offering valuable perspectives for market participants and scholars alike.

Related Reading:

Modeling, Forecasting and Trading the Crude Oil Term Structure

Are There Exploitable Trends in Commodity Future Prices?

FAQ

What is the main focus of the paper “The Skewness of Commodity Futures Returns?”

The main focus of the paper is to explore the relationship between the skewness of commodity futures returns and expected returns. The authors investigate a trading strategy that involves taking long positions in commodity futures with the most negative skewness and short positions in those with the most positive skewness.

What is the key finding regarding the trading strategy based on skewness?

The key finding is that the trading strategy, which involves long positions in commodity futures with the most negative skewness and short positions in those with the most positive skewness, generates significant excess returns. Importantly, these excess returns persist even after adjusting for exposure to well-known risk factors.

How does the paper contribute to the understanding of investor preferences and hedging practices?

The paper contributes to the understanding of investor preferences by framing the impact of skewness on future returns within the context of cumulative prospect theory. This theory suggests that investors have preferences for skewness, and the findings of the study align with such preferences. Additionally, the study highlights the role of skewness in selective hedging practices, providing insights into how market participants incorporate skewness considerations into their hedging decisions.

You can find many more Research Papers here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password