Study On Momentum And Reversal Strategies In Commodity Futures Market

This paper focuses on momentum effect,reversal effect and interaction between these in China commodity futures market.Momentum effect represents the continuation of previous rising or falling trend of asset prices,while reversal effect represents previous reverse trend.Both of these effects are deviations from efficient market hypothesis,whose persistence are incompatible with traditional financial framework.However,development of behavioral finance provides new ideas for their interpretation.Most scholars believe that momentum effect is caused by investors' overreaction to current information,while reversal effect corresponds to the subsequent correction to this.In addition,mutual promotion exists between these two effects,which is to say,when one of the effects exists,the other will strengthen.In the context of theoretical basis above,we construct momentum portfolios and reversal portfolios according to the method of Jegadeesh and Titman(1993).Besides,we construct momentum-reversal portfolios combining these two effects according to the model of Bianchi,Drew and Fan(2015).Through empirical research,we found that in China commodity futures market,momentum exists in short period of time,e.g.2 or 4 weeks,while reversal pattern is pronounced from 26 to 52 weeks after portfolio formation.On average,our momentum strategy returns 4.930% per annum,and yield of our reversal portfolio is 21.037%.However,through analysis,we found that both of momentum and reversal effects have characteristic of unilateral which only reflects on the long side,and on the short side,neither of them was significant.So,traditional portfolios above cannot take full advantage of market trend,which draw forth double-sort strategies combining these together.Combining the observed reversal pattern with the momentum signal,our double-sort strategy returns 28.401% per annum,significantly outperforming 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,global funding liquidity or transaction costs.Besides,it is found in this paper that main source of return advantage of momentum-reversal portfolios is the mutual promotion between the two effects,which contributes to portfolio return more than 20%.Existence of momentum and reversal effect means that the hypothesis of weak-form efficient market in China commodity futures market is untenable,which we believe is mainly related to investors' irrational behavior.Lack of professional knowledge and experience,loss aversion,regret aversion and other psychological biases make investors unable to implement completely rational investment decisions,leading to various financial anomalies prevalent in market.Main contribution of this paper lies in three aspects.First,in the aspect of strategy research,few domestic momentum and reversal studies puts emphasis on commodity futures market,and attempt of this paper may help to improve the relevant literature framework.Second,in the aspect of research method,strategy adopted in this paper is to combine momentum and reversal together,which is a brand-new method in domestic.Third,most domestic literatures on momentum and reversal focus on portfolio construction,while analysis of return or robustness tests were ignored,and we make some improvements here.