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Momentum and mean-reversion in commodity spot and futures markets

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  • Chaves, Denis B.
  • Viswanathan, Vivek

Abstract

We study momentum and mean-reversion strategies in commodity futures prices and their relationship to momentum and mean-reversion in commodity spot prices. We find that momentum performs well in futures markets, but not in spot markets, and that mean-reversion performs well in spot markets, but not in futures markets. A decomposition of the basis (the slope of the term-structure of futures prices) into expected risk premiums and expected changes in spot prices helps us shed some light on the different results across the futures and spot markets. Most interestingly, we find that momentum in futures prices cannot be explained by a sustained trend in spot prices.

Suggested Citation

  • Chaves, Denis B. & Viswanathan, Vivek, 2016. "Momentum and mean-reversion in commodity spot and futures markets," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 39-53.
  • Handle: RePEc:eee:jocoma:v:3:y:2016:i:1:p:39-53
    DOI: 10.1016/j.jcomm.2016.08.001
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    References listed on IDEAS

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    Cited by:

    1. Adam Zaremba, 2019. "The Cross Section of Country Equity Returns: A Review of Empirical Literature," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(4), pages 1-26, October.
    2. Coffey, Brian K. & Tonsor, Glynn T. & Schroeder, Ted C., 2018. "Impacts of Changes in Market Fundamentals and Price Momentum on Hedging Live Cattle," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(1), January.
    3. Jena, Sangram Keshari & Tiwari, Aviral Kumar & Hammoudeh, Shawkat & Roubaud, David, 2019. "Distributional predictability between commodity spot and futures: Evidence from nonparametric causality-in-quantiles tests," Energy Economics, Elsevier, vol. 78(C), pages 615-628.
    4. Zaremba, Adam & Kizys, Renatas & Raza, Muhammad Wajid, 2020. "The long-run reversal in the long run: Insights from two centuries of international equity returns," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 177-199.

    More about this item

    Keywords

    Commodity futures; Basis; Momentum; Mean-reversion; Trend-following; Trading strategies;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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