REVERSAL OVERLAY FROM COMMODITY FUTURES

Abstract

This study gets insight from a recently published article which finds out the predicting role of the “CFEAR” in the commodity futures market. It becomes interesting for me to check its robustness in a longer period. Due to the limitations of internet access prior to their sample period, this paper has examined whether a nearest proxy for the “CFEAR” can produce similar result. The proxied “Simple 5” portfolio failed to perform similarly out of sample. However, through examining various cross-sectional exploratory regressions and 576 different momentum strategies, a risky 6-Month Reversal patterns from the commodity futures returns has been identified in the training period. When this 6-Month Reversal portfolio added as an overlay to the Equal Weighted Commodity Portfolio and some conventional benchmarks in the stock market, the overlay can enhance the performance out-of-sample. Due to the limitations of data availability, other common factors such as basis, basis-momentum, relative basis, hedging pressure are not included in the study. A high Sharpe Ratio from the Reversal Portfolios indicates informationally inefficient markets. Thus, examining the economic significance of the short-term reversal strategies seems meaningful for the academia and practitioners