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Two Centuries of Commodity Futures Premia: Momentum, Value and Basis

Last Updated on 10 February, 2024 by Rejaul Karim

The groundbreaking study “Two Centuries of Commodity Futures Premia: Momentum, Value, and Basis” by Christopher Geczy of the University of Pennsylvania’s Wharton School and Mikhail Samonov of Two Centuries Investments presents a deep exploration of the long-term dynamics of commodity futures premia.

By meticulously scrutinizing hand-collected data of commodity futures contracts dating back to 1877, the researchers replicate and analyze the well-established cross-sectional commodity factor premia of momentum, value, and basis. It is revealed that all three premia exhibit significantly positive trends throughout an additional 80-plus years of pre-sample data, highlighting their enduring relevance.

Furthermore, the study demonstrates that a long-only premia portfolio substantially enhances its Sharpe ratio in both early and recent samples, suggesting an optimized approach for accessing commodity exposure while preserving its beneficial inflation-hedging properties.

This research sheds crucial light on the persistent and influential nature of commodity futures premia, offering essential insights for portfolio management and long-term investment strategies.

Abstract Of Paper

Using hand-collected data of commodity futures contracts going back to 1877, we replicate in the pre-sample history the well-documented cross-sectional commodity factor premia of momentum, value and basis. All three premia remain significantly positive in the additional 80-plus years of pre-sample data. Compared to a long-only passive basket of commodity futures, a long-only premia portfolio more than doubles its Sharpe in both the early and recent samples, suggesting a more optimal way to obtain portfolio’s commodity exposure while maintaining its beneficial inflation hedging property.

Original paper – Download PDF

Here you can download the PDF and original paper of Two Centuries of Commodity Futures Premia: Momentum, Value and Basis.

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Author

Christopher Geczy
University of Pennsylvania – The Wharton School, Finance Department

Mikhail Samonov
Two Centuries Investments

Conclusion

In culmination, Christopher Geczy and Mikhail Samonov’s comprehensive research on “Two Centuries of Commodity Futures Premia: Momentum, Value, and Basis” offers pivotal insights into the enduring dynamics of commodity futures premia.

Their meticulous analysis of hand-collected data of commodity futures contracts dating back to 1877 unveils the sustained and significantly positive trends of the well-documented cross-sectional commodity factor premia of momentum, value, and basis across over 80 additional years of pre-sample data.

Moreover, the study compellingly demonstrates that a long-only premia portfolio markedly amplifies its Sharpe ratio in both early and recent samples, presenting a more optimized approach for obtaining commodity exposure while upholding its intrinsic inflation-hedging properties.

This research thus provides critical implications for portfolio management and long-term investment strategies, offering valuable guidance for harnessing the enduring efficacy of commodity futures premia in diverse market scenarios.

Related Reading:

Do Momentum and Reversal Strategies Work in Commodity Futures? A Comprehensive Study

Is the Supply Curve for Commodity Futures Contracts Upward Sloping?

FAQ

Q1: What are the key findings regarding the cross-sectional commodity factor premia of momentum, value, and basis in “Two Centuries of Commodity Futures Premia”?

A1: The study reveals that all three cross-sectional commodity factor premia of momentum, value, and basis remain significantly positive throughout an additional 80-plus years of pre-sample data. This underscores the enduring relevance and persistence of these premia in commodity futures markets.

Q2: How does the research suggest optimizing commodity exposure while maintaining inflation-hedging properties?

A2: The study demonstrates that compared to a long-only passive basket of commodity futures, a long-only premia portfolio more than doubles its Sharpe ratio in both early and recent samples. This suggests a more optimal way to obtain commodity exposure while preserving the beneficial inflation-hedging properties of the portfolio.

Q3: What is the significance of the study’s findings for portfolio management and long-term investment strategies?

A3: The research provides crucial insights for portfolio management and long-term investment strategies by highlighting the enduring efficacy of commodity futures premia. Investors can benefit from these premia by incorporating a long-only premia portfolio, which offers enhanced Sharpe ratios and optimized commodity exposure, contributing to more robust and effective investment strategies over the long term.

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