How to Time the Commodity Market

16 Pages Posted: 22 Jun 2006 Last revised: 10 Sep 2016

See all articles by Devraj Basu

Devraj Basu

SKEMA Business School - Lille Campus

Roel C. A. Oomen

Deutsche Bank AG (London); London School of Economics & Political Science (LSE) - Department of Statistics

Alexander Stremme

University of Warwick - Finance Group

Date Written: June 1, 2006

Abstract

Over the past few years, commodity prices have experienced the biggest boom in half a century. In this paper we investigate whether it is possible by active asset management to take advantage of the unique risk-return characteristics of commodities, while avoiding their excessive volatility. We show that observing (and learning from) the actions of different groups of market participants enables an active asset manager to successfully 'time' the commodities market. We focus on the information contained in the Commitment of Traders report, published by the CFTC. This report summarizes the size and direction of the positions taken by different types of traders in different markets. Our findings indicate that there is indeed significant informational content in this report, which can be exploited by an active portfolio manager. Our dynamically managed strategies exhibit superior out-of-sample performance, achieving Sharpe ratios in excess of 1.0 and annualized alphas relative to the S&P 500 of around 15%.

Keywords: commodities, active asset management, return predictability, Commitment of Traders report

JEL Classification: C32, G11, G14, E44, Q49

Suggested Citation

Basu, Devraj and Oomen, Roel C.A. and Stremme, Alexander, How to Time the Commodity Market (June 1, 2006). Journal of Derivatives & Hedge Funds, Vol. 16, No. 1, pp. 1-8, 2010. Available at SSRN: https://ssrn.com/abstract=910907 or http://dx.doi.org/10.2139/ssrn.910907

Devraj Basu

SKEMA Business School - Lille Campus ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

Roel C.A. Oomen (Contact Author)

Deutsche Bank AG (London) ( email )

Winchester House
1 Great Winchester Street
London, EC2N 2DB
United Kingdom

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Alexander Stremme

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
+44 (0) 2476 - 522 066 (Phone)
+44 (0) 2476 - 523 779 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
3,473
Abstract Views
10,855
rank
2,843
PlumX Metrics