Commodity Futures Momentum: Sources of Risk and Anomalies

Abstract

This paper explores the source(s) of commodity futures momentum and an associated anomaly. We decompose the 12-month conventional momentum strategy into single-month momentum components. Historical information in the cross-section of returns at 10 to 11 months prior to portfolio formation explains some of the variation in commodity futures momentum. This anomaly persists after controlling for standard risk factors, commodity-specific risks, behavioral factors, transaction costs, commodity sectors or seasonality effects. The sources of risk and return in this anomaly are sufficiently different to conventional momentum. We find that limits to arbitrage and investor sentiment are significant in explaining the excess returns in commodity futures momentum and its associated anomaly. The introduction of limits to arbitrage and investor sentiment extends our understanding of commodity futures momentum.

Keywords: Momentum, Commodity Futures, Anomaly, Limits to Arbitrage, Investor Sentiment

JEL Classification: G11, G13, G14