Commodity Futures

Does the profitability of futures traders depend on risk-taking, private information or luck? In the January 2010 revision of their paper entitled “Determinants of Trading Profits of Individual Traders: Risk Premia or Information”, Michaël Dewally, Louis Ederington and Chitru Fernando investigate success factors for traders in the crude oil, gasoline and heating oil futures markets. They exploit detailed daily open interest data for specific large and mid-size traders (from the Commodity Futures Trading Commission, as augmented by the Department of Energy) accounting for about 70% to 80% of these three futures markets. This detailed data enables analytical segmentation of traders into eleven types, consolidated into four categories: (1) hedgers, (2) speculators, (3) market makers and (4) others. Using detailed data for a final sample of 382 traders over the period June 1993 through March 1997 (46 months), they conclude that: Keep Reading

Is the aggregate sentiment of futures traders predictive for asset returns? In the June 2008 update of their paper entitled “How to Time the Commodity Market”, Devraj Basu, Roel Oomen and Alexander Stremme investigate whether information in the weekly Commodity Futures Trading Commission’s Commitments of Traders (COT) reports enable successful timing of U.S. equities and commodities markets. These reports aggregate the size and direction of the positions taken by different categories of futures traders in different assets. “Commercial” traders use futures contracts for hedging, “non-commercial” traders use them for other types of speculation and “non-reportable” traders operate below the reporting threshold. The study seeks to exploit “hedging pressure” (the fraction of positions that are long) for each of six liquid commodities (crude oil, gold, silver, copper, soybeans and sugar) and for the S&P 500 Index. Each Friday, the six trading strategies studied: (1) take a long position in a commodity if hedging pressure for both the commodity and the S&P 500 Index are below their 52-week averages; or, (2) take a long position in the S&P 500 Index if hedging pressure for both the commodity and the S&P 500 Index are above their 52-week averages; or, (3) hold 3-month U.S. Treasury bills. Using COT reports and associated weekly futures prices for October 1992 through December 2006, they conclude that: Keep Reading

How can long-term investors best hedge against inflation’s erosion of purchasing power? In their April 2009 paper entitled “Inflation Hedging for Long-Term Investors”, Alexander Attie and Shaun Roache assess the inflation hedging properties of traditional asset classes over different investment horizons. Using total return indexes for several asset classes from initial data availability (January 1927 at the earliest) through November 2008, they conclude that: Keep Reading

A reader asked: “Have you ever undertaken a study of the EIA Short Term Energy Outlook (STEO) or other EIA forecasts to evaluate the degree of accuracy one could reasonably expect from them?” Keep Reading

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

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

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

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

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

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