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Dynamic Commodity Timing Strategies

28 Pages Posted: 25 Aug 2004 Last revised: 27 Nov 2009

Evert B. Vrugt

VU University Amsterdam, PGO-IM

Rob Bauer

Maastricht University

Roderick Molenaar

Robeco Asset Management

Tom Steenkamp

ABP Investments - Research Department

Date Written: July 1, 2004

Abstract

Recent research documents that commodities are good diversifiers in traditional investment portfolios: overall portfolio risk is reduced while less than proportional return is sacrificed. These studies generally find a relatively high volatility in commodity returns, which implies a huge potential for tactical strategies. In this paper we investigate timing strategies with commodity futures using factors directly related to the stance of the business cycle, the monetary environment and the sentiment of the market. We use a dynamic model selection procedure in the spirit of the recursive modeling approach of Pesaran and Timmermann [1995]. However, instead of using in-sample model selection criteria, we build on the extensions of Bauer, Derwall and Molenaar [2004] by introducing an out-of-sample model training period to select optimal models. The best models from this training period are used to generate forecasts in a subsequent trading period. Our results show that the variation in commodity future returns is sufficiently predictable to be exploited by a realistic timing strategy.

Keywords: Commodity futures, market timing

JEL Classification: G11, G14, G15, G2

Suggested Citation

Vrugt, Evert B. and Bauer, Rob and Molenaar, Roderick and Steenkamp, Tom, Dynamic Commodity Timing Strategies (July 1, 2004). Available at SSRN: https://ssrn.com/abstract=581423 or http://dx.doi.org/10.2139/ssrn.581423

Evert B. Vrugt (Contact Author)

VU University Amsterdam, PGO-IM ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Roderick Molenaar

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Tom Steenkamp

ABP Investments - Research Department ( email )

WTC Schiphol Airport
Tower C, 5th Floor P.O. Box 75753
Schiphol NL-1118 ZX
Netherlands

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