Factor based commodity investing

A trend factor in commodity futures markets: Any economic gains from using information over investment horizons?

“…Boons and Prado (2019) find that the basis‐momentum factor and the average factor can explain a large variation of the cross‐sectional returns. Sakkas and Tessaromatis (2020) find that a combination of the above six factors (momentum, hedging pressure, basis, basis‐momentum, average, and value) outperforms models constructed with other factors.…”

“…According to Sakkas and Tessaromatis (2020), the maximum annual transaction cost for single‐sort zero spread portfolios is 0.2112 (12 × 4 × 4.4 basis points), where 4 is the maximum monthly turnover rate of a single‐sort portfolio when we need to close all the previous contracts and open new contracts, and 4.4 is the estimated maximum half spread according to Marshall et al (2012). The comparison of the trend factor before and after transaction cost is presented in Table 10.…”

“…Momentum, which utilizes intermediate‐term trend signals (usually 6 or 12 months), is one of the most extensively studied trend‐following strategies in the literature (e.g., Erb & Harvey, 2006; Huang et al, 2020; Hurst et al, 2017; Miffre & Rallis, 2007; Moskowitz et al, 2012; Shen et al, 2007). Researchers also find evidence that the momentum factor is a priced factor and generates a significant risk premium cross‐sectionally (e.g., Bakshi et al, 2019; Sakkas & Tessaromatis, 2020).…”

“…The annualized risk‐adjusted returns of the trend factor with respect to the benchmark multifactor models are always economically and statistically significant. For example, the annual alpha with respect to the Sakkas and Tessaromatis (2020) six‐factor model is 15.96% (). The GRS tests provide additional support in a joint‐regression setting, with F statistics rejecting the null hypothesis that the alphas of the trend portfolios are jointly equal to zero.…”

Pricing commodity futures and determining risk premia in a three factor model with stochastic volatility: the case of Brent crude oil

“…Cifuentes et al (2020) analyzed the data of copper futures between October 2010 and June 2018 and find that both exchanges exhibit a positive average risk premium for each maturity. Sakkas and Tessaromatis (2020) suggested that the risk premium of commodities is a compensation for generally negative performance during recessions. Baker (2021) found that risk premia can be reduced through financialization when studying the crude oil market.…”