The Fortune and Crash of Common Risk Factors in Chinese Commodity Markets

Hemei Li, Zhenya Liu and Yuqian Zhao
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Hemei Li: Beijing International Studies University
Zhenya Liu: Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School
Yuqian Zhao: University of Sussex

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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. \textcopyright 2023

Keywords: Augmented risk factor; Chinese commodity market; Common risk factor; Market stress; Risk factor crash (search for similar items in EconPapers)
Date: 2023-09-15
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Published in Journal of Commodity Markets, 2023, 32, ⟨10.1016/j.jcomm.2023.100362⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04435473

DOI: 10.1016/j.jcomm.2023.100362

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