Commodity Strategies Based on Momentum, Term Structure and Idiosyncratic Volatility

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 which 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.

Keywords: commodity futures, momentum, term structure, idiosyncratic volatility

JEL Classification: G13, G14