Do Momentum and Reversal Strategies Work in Commodity Futures? A Comprehensive Study

Abstract

This paper investigates the performance of three different trading strategies – Jegadeesh and Titman (1993), George and Hwang (2004) and Gatev, Goetzmann and Rouwenhorst (2006) – in 29 commodity futures from January 1979 to October 2017. We find there is no significant reversal profit across 189 formation-holding windows for all the three strategies. However, there are statistical and economically significant momentum profits, and the profitability increases with the rising of formation-holding periods. The strategy of inversing the conventional Gatev, Goetzmann and Rouwenhorst (2006) is more profitable than the other two momentum strategies on a risk-adjusted basis; but the superiority declines sharply since 1998. Momentum returns are quite sensitive to market conditions but the crash of momentum returns are partly predictable. Return seasonality, risk and herding also provide partial explanation of the momentum profits.

Keywords: Commodity futures, Momentum, Reversal, Formation-holding windows, Herding

JEL Classification: G11, G12, G13, G14