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

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.

Number of Pages in PDF File: 48

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

JEL Classification: G13, G14

working papers series