On commodity trading strategies: momentum, term structure, maturity, indexation

The thesis investigates the presence of idiosyncratic characteristics in commodity futures markets that lead to profitable trading strategies, effectively testing the efficiency of commodity markets. First, short-term continuation and long-term reversal in commodity futures prices are examined. While contrarian strategies do not work, 13 profitable momentum strategies have been identified that generate 9.38% average return a year. On average the momentum strategies buy backwardated contracts and sell contangoed contracts. Testing the direct implication of this behavior, the strategy of buying the most backwardated and selling the most contangoed commodities is examined. With significant annualized alphas of 10.14% and 12.66% respectively the momentum and term structure strategies appear profitable when implemented individually. The thesis continues by investigating the combined role of momentum and term structure signals. 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. The thesis continues by examining the role of momentum, term structure and time to maturity/expiry factors in the design of enhanced commodity indices. In a long-only framework the momentum parameterized Standard & Poor's Goldman Sachs Commodity Index (S&P- GSCI former GSCI) and Dow-Jones UBS Commodity Index (DJ-UBSCI former DJ-AIGCI) yield 0.46 and 0.9 times higher returns than the traditional S&P-GSCI and DJ-UBSCI respectively. The term structure parameterized S&P-GSCI and DJ-UBSCI exhibit 0.63 and 0.68 times higher returns respectively. The combined parameterized indices increase the outperformance by 0.65 and 1.02 times and the longer maturity indices yield on average 1.37 and 1.97 times higher returns than the traditional indices respectively. These findings can be exploited for diversification purposes in a long-only commodity world or deployed as a framework to facilitate choosing among commodity indices. Keywords: Commodity futures, Momentum, Term Structure, Backwardation, Contango, Diversification, Commodity indice