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Abstract:
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.

Commodity futures, Momentum, Backwardation, Contango, Diversification

Abstract:
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.

Commodity futures, Momentum, Backwardation, Contango, Diversification

Abstract:
Most previous tests of hedge fund performance have failed to model the exposure of hedge fund returns to systematic non-normality risks, nor have they taken the tactical asset allocation decisions of hedge funds managers into account. This paper shows that failure to account for these features leads to incorrect statistical inferences on the performance of 1 out of 4 hedge funds and overstates hedge funds' alpha by 1.54% on average. Put another way, hedge funds offer abnormal returns that are 23.1% lower than commonly accepted.

Hedge funds, performance evaluation, alpha, systematic skewness, systematic kurtosis, tactical asset allocation

Abstract:
Most previous tests of hedge fund performance have failed to model the exposure of hedge fund returns to systematic non-normality risks, nor have they taken the tactical asset allocation decisions of hedge funds managers into account. This paper shows that failure to account for these features leads to incorrect statistical inferences on the performance of 1 out of 4 hedge funds and overstates hedge funds' alpha by 1.54% on average. Put another way, hedge funds offer abnormal returns that are 23.1% lower than commonly accepted.

Hedge funds, performance evaluation, alpha, systematic skewness, systematic kurtosis, tactical asset allocation

Abstract:
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%, 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.

Commodity Futures, Momentum, Term Structure, Backwardation, Contango, Double-sort strategy

Abstract:
The article studies the conditional correlations between 25 commodity futures and 13 stock and fixed-income indices. Conditional correlations with equity returns fell over time, a sign that commodity futures have become better tools for strategic asset allocation. The correlations between the S&P500 and 11 commodities also fell in periods of above average volatility in equity markets. We see this as welcome news to long institutional investors as they need the benefits of diversification most in periods of high volatility in equity markets. Similarly, the results suggest that adding commodity futures to Treasury-bill portfolios reduces risk further in volatile interest rate environments.

Commodity Futures, Traditional Assets, Correlation, Volatility, DCC Model

Abstract:
The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Momentum profits, Transaction costs, Low-cost strategy

Abstract:
The paper examines the role of non-normality risks in explaining the momentum puzzle of equity returns. It shows that momentum profits are not normally distributed and, relatedly, that the momentum profitability is partly a compensation for systematic negative skewness risk in line with market efficiency. This finding is pervasive across nine trading strategies that combine different holding and ranking periods and is reinforced when time dependencies in abnormal returns and risks are explicitly modeled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve over the business cycle in a manner that is consistent with market timing and risk aversion. While non-normality risks matter, a large proportion of the momentum profits remains unexplained which may provide comfort to behavioural theorists.

Momentum strategy, Abnormal returns, Skewness, Conditional asset pricing

Abstract:
This study proposes a utility-based framework for the determination of optimal hedge ratios that can allow for the impact of higher moments on the hedging decision. The approach is applied to a set of 20 commodities that are hedged with futures contracts. We examine the entire hyperbolic absolute risk aversion (HARA) family of utilities which include quadratic, logarithmic, power and exponential utility functions. We find that for small to moderate commodity exposure, the performance of hedges constructed allowing for non-zero higher moments is only very slightly better than the performance of the much simpler OLS hedge ratio. For high commodity exposures, higher moments do matter and their relative weights in the utility function affect the optimal decision in-sample but not out of sample. We support our empirical findings by theoretical analysis of optimal hedging decisions and we uncover a novel link between optimal hedge ratios and the minimax hedge ratio, that is the ratio which minimizes the largest loss of the hedged position.

utility-based hedging, OLS, non-normality risk, commodity futures, skewness, kurtosis

Abstract:
The recent surge of investment in commodities prompts a re-examination of whether there is a risk premium in commodity futures markets. Following the methodology of Fama and French (1993), we construct for a sample of 27 commodities a mimicking portfolio that is based on the generalized hedging pressure hypothesis of Cootner (1960) and Hirshleifer (1990). Over the period 1992-2008, the resulting dynamic long-short portfolio outperforms a passive buy-and-hold portfolio, suggesting the presence of a time-varying risk premium in commodity futures markets and the need for active management to capture this risk premium. The risk premium thus identified is capable of capturing part of the outperformance of active portfolios sorted on momentum and term structure signals.

Commodity, Risk premium, Hedging pressure

Abstract:
Numerous studies have documented the failure of the static and conditional capital asset pricing models to explain the difference in returns between value and growth stocks. This paper examines the post-1963 value premium by employing a model that captures the time-varying total risk of the value-minus-growth portfolios. Our results show that the time-series of value premia is strongly and positively correlated with its volatility. This conclusion is robust to the criterion used to sort stocks into value and growth portfolios and to the country under review (U.S. and U.K.). Our paper therefore adds to the weight of evidence on the possible role of idiosyncratic risk in explaining equity returns.

Value premium, CAPM, GJR-GARCH(1,1)-M, Conditional unsystematic risk

Abstract:
This study assesses whether the widely documented momentum profits can be attributed to time-varying risk as described by a GJR-GARCH(1,1)-M model. We reveal that momentum profits are a compensation for time-varying unsystematic risks, which are common to the winner and loser stocks but affect the former more than the latter. In addition, we find that, perhaps because losers have a higher propensity than winners to disclose bad news, negative return shocks increase their volatility more than it increases those of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners.

Momentum profits, Unsystematic risk, GJR-GARCH(1,1)-M model

Abstract:
This study assesses whether the widely documented momentum profits can be ascribed to time-varying risk as described by a GJR-GARCH(1,1)-M model. Consistent with rational pricing in efficient markets, we reveal that momentum profits are a compensation for time-varying unsystematic risks, common to the winner and loser stocks. We also find that, because losers have a higher propensity than winners of disclose bad news, negative return shocks increase their volatility more than it increases that of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners. Following Hong et al. (2000), we interpret this as a sign that managers of loser firms are reluctant to disclosing bad news, while managers of winner firms are eager to releasing good news.

Momentum profits, Common unsystematic risk, GJR-GARCH(1,1)-M

Abstract:
We construct dynamic trading strategies based on the theories of Cootner (1960), Stoll (1979) and Hirshleifer (1990). These strategies are constructed using the aggregate positions of hedgers and speculators. Our active strategies applied to 13 liquid commodity futures outperform buy-and-hold strategies for 10 of the 13 commodities, suggesting that tactical trading is a source of enhanced performance in commodity futures markets. Our findings underline the importance of hedging both price risk and quantity risk, and point to the need to dynamically trade commodity futures.

Commodity futures, Hedging pressure, Active strategies

Abstract:
This study considers the relationship between trading volumes, transactions costs, and the profitability of momentum strategies using data from the UK. We demonstrate that round-trip transactions costs for selling loser firms are around double those of buying winners, and in particular, the costs of selling low volume losers is more than twice as high as the cost of selling low volume winners. By contrast, there are only modest differences between the costs of buying winners and losers, irrespective of their volume levels. Yet we observe that, even in net terms, momentum strategies based on low volume stocks are more profitable than those using high volume stocks. We also note important differences between transactions costs measured using quoted versus effective spreads. Altogether, our findings should sound a word of caution for any study attempting to evaluate the impact of transactions costs on momentum profitability that such costs are very heterogeneous across firms and trade types, implying that they require careful calculation.

Momentum profits, Transaction costs, bid-ask spreads, trading volume

Abstract:
A vast literature has documented the value premium and the small firm effect as pervasive stylized facts in empirical asset pricing and yet research has been largely unable to provide entirely convincing explanations of why these phenomena exist. This paper demonstrates that the cross-sectional variation in returns between portfolios sorted by size and book-to-market value is significantly and positively related to the conditional volatility of those portfolios. We show that the explanatory power of the portfolios' sensitivities to conditional volatility for the cross-section of returns is in addition to that embodied in the sensitivities to market risk, macroeconomic, book-to-market and market capitalization factors.

cross-sectional variation in stock returns, CAPM, GARCH-M, conditional volatility, risk premium

Abstract:
This paper uses a conditional multifactor model and shows that the basis of foreign currency instruments includes a time-varying risk premium that is related to the conditional risk of the basis and to the conditional prices of systematic risk present in all assets markets. The result therefore reinforces the view, initially put forward by Bailey and Chan (1993), that the basis is priced rationally in an efficient market. The article also shows that the premium for basis risk increases with the maturity of the instruments used for hedging.

Abstract:
This paper studies the pricing efficiency in the FTSE 100 futures contract by linking the predictable movements in futures returns to the time-varying risk and risk premia associated with prespecified factors. The results indicate that the predictability of the FTSE 100 futures returns is consistent with a conditional multifactor model with time-varying moments. The dynamics of the factor risk premia, combined with the variation in the betas, capture most of the predictable variance of returns, leaving little variation to be explained in terms of market inefficiency. Hence the predictive power of the instruments does not justify a rejection of market efficiency.

FTSE 100 Futures Contract, Efficiency, Time-varying Risk, Risk Premia