Limits to Arbitrage and Commodity Index Investment: Front-Running the Goldman Roll

Abstract:     
This paper studies the unique rolling activity of commodity index in futures markets and shows that the resulting price impact is statistically and economically significant. Two trading strategies, devised to exploit this anomaly, yielded excess returns with positive skewness and Sharpe ratios as high as 4.39 from 2000 to March 2010. The profitability of the strategies is positively correlated with the net result of two opposite forces: the size of index investment and the amount of arbitrage capital employed. Due to the price impact, investors forwent 3.6\% annual return, 48\% higher Sharpe ratio, and billions of dollars over the period.

Number of Pages in PDF File: 46

Keywords: Commodity Index, Roll Yield, Front Running, Goldman Roll

JEL Classification: G11, G13, G14

working papers series