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Commodity Strategies Based on Momentum, Term Structure, and Idiosyncratic Volatility

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  • The research was supported by funding from INQUIRE UK which we gratefully acknowledge. The article represents the views of the authors and not of INQUIRE UK. We would like to thank two anonymous referees, Katja Ahoniemi, Chris Brooks, Jerry Coakley, and George Skiadopoulos for useful suggestions. We also acknowledge the comments from seminars participants at the Universitat de Illes Ballears, Universidad de las Palmas de Gran Canaria, 2012 EDHEC-Risk Days Conference and 2011 CSDA Conference on Computational and Financial Econometrics.

Abstract

This article demonstrates that momentum, term structure, and idiosyncratic volatility signals in commodity futures markets are not overlapping, which inspires a novel triple-screen strategy. We show that simultaneously buying contracts with high past performance, high roll-yields, and low idiosyncratic volatility, and shorting contracts with poor past performance, low roll-yields, and high idiosyncratic volatility yields a Sharpe ratio over the 1985 to 2011 period that is five times that of the S&P-GSCI. The triple-screen strategy dominates the double-screen and individual strategies and this outcome cannot be attributed to overreaction, liquidity risk, transaction costs, or the financialization of commodity futures markets. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:274–297, 2015

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