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Combining momentum with reversal in commodity futures

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  • Bianchi, Robert J.
  • Drew, Michael E.
  • Fan, John Hua

Abstract

This paper examines profitable trading strategies that jointly exploit momentum and reversal signals in commodity futures. While the single-sort momentum strategies returns 11.14% per annum, on average, a consistent reversal pattern of momentum profits is pronounced from 12 to 30months after portfolio formation. Combining the observed reversal pattern with the momentum signal, our double-sort strategy returns 20.24% per annum, which significantly outperforms single-sort strategies. The proposed strategy is robust to seasonality effects and sample adjustments in commodity futures. The profitability of the double-sort strategy cannot be explained by standard risk factors, term structure, market volatility, investor sentiment, data-mining or transaction costs, but appears to be related to global funding liquidity. As a consequence, the double-sort strategy in commodity futures may be employed as a portfolio diversification tool.

Suggested Citation

  • Bianchi, Robert J. & Drew, Michael E. & Fan, John Hua, 2015. "Combining momentum with reversal in commodity futures," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 423-444.
  • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:423-444
    DOI: 10.1016/j.jbankfin.2015.07.006
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    Cited by:

    1. repec:eee:jrpoli:v:53:y:2017:i:c:p:208-218 is not listed on IDEAS
    2. Benjamin R. Auer & Benjamin Mögel, 2016. "How Accurate are Modern Value-at-Risk Estimators Derived from Extreme Value Theory?," CESifo Working Paper Series 6288, CESifo Group Munich.
    3. repec:taf:oaefxx:v:5:y:2017:i:1:p:1339772 is not listed on IDEAS
    4. repec:kap:rqfnac:v:50:y:2018:i:4:d:10.1007_s11156-017-0652-y is not listed on IDEAS
    5. Auer, Benjamin R., 2016. "On the performance of simple trading rules derived from the fractal dynamics of gold and silver price fluctuations," Finance Research Letters, Elsevier, vol. 16(C), pages 255-267.
    6. repec:eee:ecofin:v:43:y:2018:i:c:p:169-205 is not listed on IDEAS
    7. Bianchi, Robert J. & Drew, Michael E. & Fan, John Hua, 2016. "Commodities momentum: A behavioral perspective," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 133-150.
    8. repec:eee:glofin:v:35:y:2018:i:c:p:115-137 is not listed on IDEAS

    More about this item

    Keywords

    Commodity futures; Momentum; Reversal; Double-sort strategy; Seasonality; Funding liquidity;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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