49 Pages Posted: 29 Oct 2015 Last revised: 6 Oct 2016
Date Written: September 25, 2016
We study the returns to a simple trend following strategy in commodity futures markets and their drivers. Returns correlate positively to calendar spread liquidity and constraints on intermediation capital. The strategy delivers low annualized excess returns in the period from 1990 to 2004 of -0.02% that increase significantly from 2005 to 2015 to 3.65% with a Sharpe ratio of 1.1. This increase in returns coincides with increased participation in commodity markets by financial investors who use futures to maintain constant commodity market exposure but must periodically rebalance their futures maturity risk. This rebalancing creates predictable demand for liquidity. We also apply the strategy to a group of commodities not strongly affected by financialization and a set of financial futures and document no different behavior in these groups over the two parts of our sample.
Keywords: commodity markets, liquidity, momentum
JEL Classification: G12, G13, Q02
Suggested Citation: Suggested Citation
Neuhierl, Andreas and Thompson, Andrew J, Liquidity Timing in Commodity Markets and the Impact of Financialization (September 25, 2016). Available at SSRN: https://ssrn.com/abstract=2682698 or http://dx.doi.org/10.2139/ssrn.2682698