Commodity Futures

Some market commentators cite the price of crude oil as an important indicator of future stock market behavior. Is expensive crude oil a sign of future inflation or a drag on aggregate corporate earnings, or is it a proxy for general economic strength? Does a local peak (valley) in the price of crude oil portend a falling (rising) overall stock market? Comparing the weekly crude oil spot price for the U.S. with the weekly level of the S&P 500 index for the period 1/97-8/07, we find that… Keep Reading

Do relatively low transaction costs and ease of short selling enable profitable technical trading in commodity futures markets? In their recent paper entitled “Can Commodity Futures be Profitably Traded with Quantitative Market Timing Strategies?”, Ben Marshall, Rochester Cahan and Jared Cahan investigate the effectiveness of 7,846 quantitative trading rules from five rule families (Filter, Moving Average, Support and Resistance, Channel Breakouts, and On-Balance Volume) for 15 kinds of commodity futures contracts. They test these rules for cocoa, coffee, cotton, crude oil, feeder cattle, gold, heating oil, live cattle, oats, platinum, silver, soy beans, soy oil, sugar and wheat futures. Their testing includes two bootstrapping methodologies, adjustment for data snooping bias and evaluations over different time periods. Using daily price and volume data for 1984-2005, they conclude that: Keep Reading

We occasionally select for retrospective review an all-time “best selling” research paper from the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the February 2005 paper entitled “Facts and Fantasies About Commodity Futures” (download count over 12,000) by Gary Gorton and Geert Rouwenhorst. Commodity futures are derivative, short-maturity claims on real assets. Many commodities have pronounced price/volatility seasonality. In this paper, the authors compare and contrast the basic properties of commodity futures, equities and corporate bonds. Using monthly returns for stocks (the S&P 500 index), corporate bonds and a broad equally-weighted index of for commodity futures over the period July 1959 through December 2004, they conclude that: Keep Reading