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Commodity Futures

These entries address investing and trading in commodities and commodity futures as an alternative asset class to equities.

Hedging/Speculative Pressure and Commodity Futures Returns

Do commodity hedgers offer a reliable risk premium to speculators via commodity futures? In other words, can commodity futures traders generate dependable returns by trading against the net position of hedgers and with the net position of speculators as summarized in the weekly Commodity Futures Trading Commission’s Commitments of Traders (COT) reports? In the February 2009 version of their paper entitled “The Performance of Simple Dynamic Commodity Strategies”, Devraj Basu and Joelle Miffre construct real-time trading strategies based on the aggregate positions of hedgers and speculators for liquid commodity futures. They test the relative informativeness of hedgers and speculators and the effectiveness of applying active strategies to commodities that are backwardated (positive roll return) and contangoed (negative roll return). Using Wednesday closing prices on near-maturity contracts for 13 commodities (identified on the chart below) and weekly COT hedgers/speculators position data over the period 1994-2006 (1999-2006 for corn), they find that: Keep Reading

Combining Momentum and Roll Return Signals for Commodity Futures

Does combining two commodity futures trading signals shown to be effective in prior research, momentum and roll return (term structure), improve on both? In the May 2008 version of their paper entitled “Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals”, Ana-Maria Fuertes, Joelle Miffre and Georgios Rallis measure the combined value of momentum and roll return signals in the design of commodity futures trading strategies. They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers. Using daily closing prices on the nearby, second nearby and distant contracts for 37 commodities as available over the period January 1979 through January 2007, they find that: Keep Reading

Effects of Macroeconomic News on Commodity Futures

Do commodity futures prices react systematically to news about the overall U.S. economy? If so, how might investors/traders exploit the reactions? In their March 2008 working paper entitled “How Do Commodity Futures Respond to Macroeconomic News?”, Dieter Hess, He Huang and Alexandra Niessen investigate the impact of surprises in 17 U.S. macroeconomic indicators on two broad commodity futures indexes: (1) the equally-weighted CRB Index, and (2) the production-weighted S&P GSCI Commodity Index. Using macroeconomic news reports (surprise components), contemporaneous daily commodity index prices and various measures of the economic cycle over the period 1989 to 2005, they conclude that: Keep Reading

Returns and Success Factors for Commodity Futures Speculators

Do the big commodity futures speculators make money? If so, how? In their April 2008 draft paper entitled “Returns to Speculators in Commodity Futures Markets: A Comprehensive Revisit”, Christof Sigl-Grüb and Dirk Schiereck investigate the performance and performance drivers for large speculators in 22 commodity markets over the last 15 years. Using aggregate position data for non-commercial traders (large speculators) from the weekly Commodity Futures Trading Commission Commitments of Traders (COT) reports and contemporaneous daily futures price data over the period 10/1/92 to 3/6/07, they conclude that: Keep Reading

Classic Paper: Physical Inventories and Commodity Futures Returns

We occasionally select for retrospective review an all-time “best selling” research paper from the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the June 2007 paper entitled “The Fundamentals of Commodity Futures Returns” (download count over 2,500) by Gary Gorton, Fumio Hayashi and Geert Rouwenhorst. Commodity futures are derivative, short-maturity claims on real assets. In this paper, the authors apply the theory of storage to investigate relationships between the physical inventories of these assets and the returns to traders in the associated commodity futures. Using monthly data for over 30 commodity futures and associated physical inventories as available between 1969 and 2006 and data from the weekly Commodity Futures Trading Commission Commitments of Traders (COT) reports, they conclude that: Keep Reading

Momentum and Contrarian Commodity Futures Returns

Do commodity futures exhibit short-term momentum and long-term reversion, as do stocks? In the August 2006 version of their paper entitled “Momentum Strategies in Commodity Futures Markets”, Joelle Miffre and Georgios Rallis examine the profitability of 32 momentum (short-term continuation) and 24 contrarian (long-term reversal) strategies in commodity futures markets. The momentum strategies buy (sell) recently outperforming (underperforming) commodity futures and hold resulting long-short portfolios up to 12 months. The contrarian strategies buy (sell) the commodity futures that underperformed (outperformed) in the distant past and hold resulting long-short portfolios for periods of two to five years. All strategies trade liquid futures contracts with nearby maturities involving 31 commodities, unimpeded by short-selling restrictions often encountered in equity markets. Using futures contract price data spanning 1/31/79-9/30/04, they conclude that: Keep Reading

Classic Paper: Returns from Commodity Futures

We occasionally select for retrospective review an all-time “best selling” research paper from the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the January 2006 paper entitled “The Tactical and Strategic Value of Commodity Futures” (download count over 2,400) by Claude Erb and Campbell Harvey. Commodity futures are derivative, short-maturity claims on real assets. In this paper, the authors explore the strategic and tactical opportunities that these derivatives present to investors. Using long-run commodity futures return data as available mostly through mid-2004, they conclude that: Keep Reading

The Timing Performance of Expert Futures Traders

Do Commodity Trading Advisors (CTAs), generally associated with the “managed futures” hedge fund style, successfully time their chosen markets? These traders take long or short positions in investment vehicles with low transaction cost (such as futures contracts) to exploit trends in commodity prices, exchanges rates, interest rates and equity prices. In the February 2008 version of their paper entitled “Market Timing of CTAs: An Examination of Systematic CTAs vs. Discretionary CTAs”, Hossein Kazemi and Ying Li investigate the return and volatility timing ability of CTAs and examine whether there is a difference in market timing abilities between systematic and discretionary traders. To this end, they develop a set of risk factors based on returns from the most heavily traded futures contracts. Using monthly, net-of-fees return data for 1994-2004 (encompassing 278 live and 622 defunct CTA funds), they conclude that: Keep Reading

Crude Oil Price and Stock Returns

Some market commentators cite the price of crude oil as an important indicator of future stock market behavior. Is expensive crude oil a sign of future inflation or a drag on aggregate corporate earnings, or is it a proxy for general economic strength? Does a local peak (valley) in the price of crude oil portend a falling (rising) overall stock market? Comparing the weekly crude oil spot price for the U.S. with the weekly level of the S&P 500 index for the period 1/97-8/07, we find that… Keep Reading

Does Technical Trading Work with Commodity Futures?

Do relatively low transaction costs and ease of short selling enable profitable technical trading in commodity futures markets? In their recent paper entitled “Can Commodity Futures be Profitably Traded with Quantitative Market Timing Strategies?”, Ben Marshall, Rochester Cahan and Jared Cahan investigate the effectiveness of 7,846 quantitative trading rules from five rule families (Filter, Moving Average, Support and Resistance, Channel Breakouts, and On-Balance Volume) for 15 kinds of commodity futures contracts. They test these rules for cocoa, coffee, cotton, crude oil, feeder cattle, gold, heating oil, live cattle, oats, platinum, silver, soy beans, soy oil, sugar and wheat futures. Their testing includes two bootstrapping methodologies, adjustment for data snooping bias and evaluations over different time periods. Using daily price and volume data for 1984-2005, they conclude that: Keep Reading

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