Factor Momentum in Commodity Futures Markets

58 Pages Posted: 14 Feb 2024

See all articles by Yiyan Qian

Yiyan Qian

Nottingham University Business School

Ying Jiang

The University of Nottingham Ningbo, China

Xiaoquan Liu

Nottingham University Business School

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Abstract

This paper examines the factor momentum in commodity futures markets. Based on the US and UK data from 1985 to 2022, we first show that a commodity factor's past returns positively predict its future returns. This predictability leads to sizable economic profits in a long-short trading strategy, is at its strongest over the one-month horizon, and could be explained by mispricing. The factor momentum suggests mean-variance inefficient commodity factors and negatively impacts the efficiency of pricing models. We then construct the time-series efficient factors, which exhibit higher Sharpe ratios and improve the performance of pricing models. These findings are robust across international commodity futures markets. Our results point to the potential to time commodity factors and highlight the importance of conditional asset pricing in commodity futures markets.

Keywords: Return autocorrelation, mispricing, Factor enhancement, Conditional asset pricing, Mean-variance optimization.

Suggested Citation

Qian, Yiyan and Jiang, Ying and Liu, Xiaoquan, Factor Momentum in Commodity Futures Markets. Available at SSRN: https://ssrn.com/abstract=4726027 or http://dx.doi.org/10.2139/ssrn.4726027

Yiyan Qian

Nottingham University Business School ( email )

Ying Jiang

The University of Nottingham Ningbo, China ( email )

199 Taikang East Road
China

Xiaoquan Liu (Contact Author)

Nottingham University Business School ( email )

199 Taikang East Road
Yingzhou
Ningbo, Zhejiang 315100
China

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