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Combining momentum with reversal in commodity futures

Robert Bianchi, Michael Drew () and John Hua Fan

Journal of Banking & Finance, 2015, vol. 59, issue C, 423-444

Abstract: This paper examines profitable trading strategies that jointly exploit momentum and reversal signals in commodity futures. While the single-sort momentum strategies returns 11.14% per annum, on average, a consistent reversal pattern of momentum profits is pronounced from 12 to 30months after portfolio formation. Combining the observed reversal pattern with the momentum signal, our double-sort strategy returns 20.24% per annum, which significantly outperforms single-sort strategies. The proposed strategy is robust to seasonality effects and sample adjustments in commodity futures. The profitability of the double-sort strategy cannot be explained by standard risk factors, term structure, market volatility, investor sentiment, data-mining or transaction costs, but appears to be related to global funding liquidity. As a consequence, the double-sort strategy in commodity futures may be employed as a portfolio diversification tool.

Keywords: Commodity futures; Momentum; Reversal; Double-sort strategy; Seasonality; Funding liquidity (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:423-444