Momentum Strategies in Commodity Futures Markets
Read the paperopens doi.org in a new tab
What they found
The authors tested momentum and contrarian strategies on 31 U.S. commodity futures from 1979 to 2004. Thirteen momentum strategies (ranking on 1 to 12 month past returns, holding 1 to 12 months) were profitable, averaging about 9% a year, while long-horizon contrarian strategies were not. Momentum profits came from buying backwardated contracts and selling contangoed ones, because past winners were disproportionately in backwardation, and the strategy had low correlation with stocks and bonds.
What you can use
- Momentum works in commodity futures as well as in stocks, and the profits are linked to the futures curve: winners tend to be backwardated.
- Long-run reversal, which shows up in stocks, did not show up in commodities in this sample.
- Commodity momentum returns were nearly uncorrelated with equity returns, which makes them a useful diversifier.
Caveats
Gross of costs, though commodity futures are cheap to trade. Sample ends 2004; commodity momentum had a weak decade afterward.
Tags: commodities, futures, momentum, backwardation
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.