Exploitable Commodity Futures Factor Momentum?

Do published commodity futures factors exhibit exploitable momentum? In their December 2023 paper entitled “Factor Momentum in Commodity Futures Markets”, Yiyan Qian, Xiaoquan Liu and Ying Jiang examine factor momentum in fully collateralized nearest-rolled contracts of various commodity futures. They consider ten factors:

• Market –S&P Goldman Sachs Commodity Index. 
• Basis -slope of futures term structure.
• Momentum – cross-sectional predictability of past performance.
• Basis-momentum – slope and curvature of the term structure of futures returns.
• Hedging pressure – mismatch in hedging and speculating activity.
• Skewness – investor return distribution preferences and selective hedging.
• Open interest – existing price positions.
• Currency beta – changes in the U.S. dollar versus a basket of other currencies.
• Inflation beta – impact from unexpected inflation.
• Liquidity – liquidity risk of commodity futures trading.

They calculate return series for each factor by each month buying (selling) the equal-weighted fifth of commodity futures with the highest (lowest) predicted next-month returns. For each factor return series, they then test the ability of returns over the past 1, 3, 6, 9 or 12 months to predict next-month return. Using daily data for 36 commodity futures contracts from U.S. and UK markets (16 agriculture, 6 energy, 3 livestock and 10 metal) as available during January 1985 through May 2022, they find that: (more…)