Investor Psychology and Security Market Under- and Overreactions

International Momentum Strategies

This paper explores the impact of investor flows and financial market conditions on returns in crude-oil futures markets. I begin with a review of the economic mechanisms by which informational frictions and the associated speculative activity may induce prices to drift away from fundamental" values and show increased volatility. This is followed by a discussion of the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity. Finally, I present new evidence that there was an economically and statistically significant effect of investor flows on futures prices, after controlling for returns in US and emerging-economy stock markets, a measure of the balance-sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The intermediate-term growth rates of index positions and managed-money spread positions had the largest impacts on futures prices.

Investor Flows and the 2008 Boom/Bust in Oil Prices

Commodity futures risk premiums vary across commodities and over time de- pending on the level of physical inventories. The convenience yield is a decreasing, nonlinear function of inventories. Price measures, such as the futures basis, prior futures returns, prior spot returns, and spot price volatilities reflect the state of inventories and are informative about commodity futures risk premiums. We verify these theoretical predictions using a comprehensive data set on 31 commodity futures and physical inventories between 1971 and 2010. We find no evidence that the positions of participants in futures markets predict risk premiums on commodity futures.

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The Fundamentals of Commodity Futures Returns

This paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets. I argue that informational frictions and the associated speculative activity may induce prices to drift away from “fundamental” values, and may result in price booms and busts. Particular attention is given to the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity in oil markets. Furthermore, I present new evidence that there were economically and statistically significant effects of investor flows on futures prices, after controlling for returns in the United States and emerging-economy stock markets, a measure of the balance sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The largest impacts on futures prices were from intermediate-term growth rates of index positions and managed-money spread positions. Moreover, my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield. Finally, the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices.

This paper was accepted by Wei Xiong, finance.

/pdf/investor-flows-and-the-2008-boom-bust-in-oil-prices-2ownm38f29.pdf

The article tests for the presence of short-term continuation and long-term reversal in commodity futures prices. While contrarian strategies do not work, the article identifies 13 profitable momentum strategies that generate 9.38% average return a year. A closer analysis of the constituents of the long–short portfolios reveals that the momentum strategies buy backwardated contracts and sell contangoed contracts. The correlation between the momentum returns and the returns of traditional asset classes is also found to be low, making the commodity-based relative-strength portfolios excellent candidates for inclusion in well-diversified portfolios.

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Momentum strategies in commodity futures markets.

This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets With significant annualized alphas of 1014% and 1266% respectively, the momentum and term structure strategies appear profitable when implemented individually With an abnormal return of 2102%, a novel double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies This double-sort strategy can additionally be utilized as a portfolio diversification tool Interestingly, the abnormal performance of the double-sort portfolios cannot be explained by a lack of liquidity or data mining and is robust to transaction costs and to different specifications of the risk-return trade-off

/pdf/tactical-allocation-in-commodity-futures-markets-combining-59082p9kn5.pdf

Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals

The article tests for the presence of short-term continuation and long-term reversal in commodity futures prices. While contrarian strategies do not work, the article identifies 13 profitable momentum strategies that generate 9.38% average return a year. A closer analysis of the constituents of the long-short portfolios reveals that the momentum strategies buy backwardated contracts and sell contangoed contracts. The correlation between the momentum returns and the returns of traditional asset classes is also found to be low, making the commodity-based relative-strength portfolios excellent candidates for inclusion in well-diversified portfolios.

Momentum Strategies in Commodity Futures Markets

This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14% and 12.66%, respectively, the momentum and term structure strategies appear profitable when implemented individually. With an abnormal return of 21.02%, our double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies. This double-sort strategy can additionally be utilized as a portfolio diversification tool. The abnormal performance of the combined portfolios cannot be explained by a lack of liquidity, data mining or transaction costs.

/pdf/tactical-allocation-in-commodity-futures-markets-combining-54udb7ruuj.pdf

Tactical allocation in commodity futures markets: Combining momentum and term structure signals

This article formally compares two traditional long-only commodity indices, Standard & Poor's Goldman Sachs Commodity Index (S&P-GSCI) and Dow Jones-UBS Commodity Index (DJ-UBSCI), with their enhanced versions that exploit signals based on contract maturity, momentum, and term structure. The enhanced indices are found to be useful for tactical asset allocation. With alphas ranging from 2.77% to 5.49% per annum, the maturity-enhanced indices offer the best abnormal performance after accounting for liquidity risk. Momentum and term structure enhancements also earn a positive, albeit smaller, alpha of 2.10% per annum on average. All the enhanced indices are found to have comparable effectiveness for risk diversification and inflation hedging as their traditional counterparts, making them useful for strategic asset allocation.

/pdf/strategic-and-tactical-roles-of-enhanced-commodity-indices-3qymp91m1g.pdf

Georgios Rallis

Papers

Momentum strategies in commodity futures markets.

Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals

Momentum Strategies in Commodity Futures Markets

Tactical allocation in commodity futures markets: Combining momentum and term structure signals

Strategic and Tactical Roles of Enhanced Commodity Indices