Commodity ETF Co-movement as Predictor of Momentum or Reversal

Does degree of co-movement among commodity exchange-traded funds (ETF) predict whether momentum or reversal is imminent? In their September 2024 paper entitled “How to Improve Commodity Momentum Using Intra-Market Correlation”, Radovan Vojtko and Margaréta Pauchlyová investigate whether the relationship between short-term and long-term average pairwise return correlations indicates when to pursue momentum and when to pursue reversal among commodity ETFs. Based on prior research, they consider four ETFs: DBA (agriculture), DBB (base metals), DBE (energy) and DBP (precious metals). Their strategies consists of each month:

1. Ranking the four ETFs by 12-month past return.
2. Calculating average pairwise 20-day and 250-day daily return correlations for the four ETFs.
3. If the average short-term correlation is higher (lower) than the average long-term correlation, executing an equal-weighted momentum (reversal) strategy by buying (selling) the two top-ranked ETFs and selling (buying) the two bottom-ranked ETFs.

Using daily adjusted closes for the selected ETFs from the end of 2007 through early 2024, they find that: (more…)