Performance of Momentum and Contrarian Strategies in Commodity Markets

Abstract

Momentum and contrarian anomalies have been detected in financial markets by multiple previous studies such as De Bondt & Thaler (1985) and Jegadeesh & Titman (1993). The effects of short-term continuation and long-term reversal have proven to be one of the strongest market anomalies and are shown to exist in different geographical areas and across various asset classes (Fuertes & Miffre: 2007; Assness, Moskowitz & Pedersen: 2013). The purpose of this thesis is to examine whether short-term continuation and long- term continuation exist in the commodity markets and do the strategies examined have a potential in portfolio diversification and inflation hedging. This thesis examines 16 short-term momentum and 9 long-term contrarian strategies in commodity markets. The data used in this thesis covers a time period of January 2000 to December 2018. The purpose is to examine if the strategies examined, are able to produce excess returns in various ranking and holding periods and are they sensitive to these factors. The profitability of the strategies is also tested by using a multifactor model which tests whether the returns of the strategies are compensations for the risk. The correlations between the returns of the strategies and asset classes such as bonds, equities and commodities is also examined. Furthermore, this thesis examines the possible inflation hedging properties of the strategies by examining the correlations between the strategy returns and inflation. The results obtained in this thesis suggest that the contrarian strategies in commodity markets are not able to produce excess returns. However, 12 out of the 16 momentum strategies are able to generate positive and significant returns with an average of 6.63% annually. Furthermore, the returns cannot be considered as compensation for the risk. In addition, the momentum strategies in commodity markets do have benefits in portfolio diversification due to the low correlation with other traditional asset classes. However, the results for the inflation hedging benefits are controversial and do not suggest that the strategies work in inflation hedging.