The Fortune and crash of common risk factors in Chinese commodity markets

Hemei Li, Zhenya Liu and Yuqian Zhao

Journal of Commodity Markets, 2023, vol. 32, issue C

Abstract: This paper investigates the performance of nine commonly discussed market anomalies in the Chinese commodity market. By studying a data sample from 2005 to 2020, we find the common risk factors associated with term structure and momentum anomalies effectively explain the cross-sectional excess returns and generate profitable sorting portfolios. Meanwhile, we empirically demonstrate that the term structure and momentum risk factors significantly crash during periods of high market stress, although they bring overall good outperformance in out-of-sample. We attribute these crashes to high time-varying volatility. Inspired by the augmented momentum crash strategy of Daniel and Moskowitz (2016), we construct augmented term structure and momentum risk factors to improve their performances in the Chinese commodity futures market. The out-of-sample Sharpe ratios of the term structure and momentum risk factors increase from 0.75 to 1.08 and from 0.66 to 0.77, respectively. In particular, both risk factors exhibit over 100% increments in out-of-sample Sharpe ratios during bear markets.

Keywords: Common risk factor; Risk factor crash; Augmented risk factor; Market stress; Chinese commodity market (search for similar items in EconPapers)
JEL-codes: G12 G13 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:32:y:2023:i:c:s2405851323000521

DOI: 10.1016/j.jcomm.2023.100362

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