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 30. months 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.
Original language | English |
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Pages (from-to) | 423-444 |
Number of pages | 22 |
Journal | Journal of Banking and Finance |
Volume | 59 |
DOIs | |
Publication status | Published - 1 Oct 2015 |
Externally published | Yes |
Keywords
- Commodity futures
- Double-sort strategy
- Funding liquidity
- Momentum
- Reversal
- Seasonality