Skip to main content

Curved Momentum: A new trading strategy for commodity futures

24th Jan Chardin 19

A recent paper by Dr Chardin Wese Simen and his co-authors proposes a strategy termed: curve momentum. Essentially the strategy looks at each futures market in isolation and trades different maturities of the futures contracts written on the same underlying commodity. To illustrate this, the curve momentum trader interested in trading oil futures compares the historical performance of the first two nearby contracts of WTI crude oil, opens a long position in the nearby that had the best performance (over the measurement period) while taking a short position in the other nearby. An important point is that this strategy operates within the curve unlike the conventional momentum that works across futures curves.

The authors document that the diversified curve momentum strategy has performed well during their sample period (1989—2015). This is evidenced by a return of 1.28% per unit of risk taken. To put this result in perspective, the conventional momentum strategy yields a return of 0.72% per unit of risk. Interestingly, the curve momentum returns are weakly correlated with those of the traditional momentum as evidenced by a correlation estimate of 0.16. This result could be of interest to asset managers, who are looking to diversify away from the traditional momentum strategy.

What could explain the performance of this strategy? One possibility may be that the strategy rewards investors for crash risk. That is, the positive returns are simply a compensation for investing in a strategy that may crash. Unfortunately, this hypothesis is difficult to reconcile with the data as the returns to the strategy are positively (rather than negatively) skewed. Another possibility is that the returns reward investors for macroeconomic risk. The paper considers a wide range of macroeconomic variables and does not find strong evidence to back this claim. One may also wonder if the curve momentum strategy is simply a repackaged version of existing strategies such as commodity carry and commodity momentum. The regression results show that the returns to the proposed strategy cannot be explained by those of existing systematic strategies.

Given these results, one may wonder whether trading frictions may be preventing investors from arbitraging this opportunity. The paper discusses the potential impact of transaction costs. Since the strategy is based on the first two nearby futures contracts, transaction costs are relatively low and liquidity is pretty good, making the strategy simple and easy to implement. It is thus difficult to argue that transaction costs are preventing arbitrageurs from stepping in.

The research involves several robustness checks. For instance, changing the period over which the trading signal is measured does not materially affect the main conclusions. Accounting for a 1-week delay between the time when the signal is measured and the time when the trade is implemented does not change the key results. Going forward, it would be interesting to see how well the curve momentum strategy stands the test of time. Find out more about Dr Chardin Wese Simen’s research.

View profile

Published 26 January 2018

You might also like

New Investment Management Degree

17 June 2006
The ICMA Centre, University of Reading, in collaboration with 7city Learning, launches an innovative MSc in Investment Management integrating academic study delivered by leading faculty with preparation for the Chartered Financial Analyst® Level 1 Study Program.

Bulmershe students take top position in Business School Stock Market Competition

24 July 2015
On Thursday 2 July, the ICMA Centre at Henley Business School hosted its fourth annual Stock Market Competition for sixth form and college students interested in a career in finance and trading. The competition took place in the ICMA Centre’s world-class trading rooms, and after an exciting day, Greg Dean and Nischal Timalsina from Bulmershe School were awarded iPads and a trophy as the competition winners.
Press releases

Universities Business Challenge- Henley team reach final

18 March 2013
Congratulations to Kadi Huang, Chris Himpich, Alex Priest and Daniel Lim for reaching the final of the Universities Business Challenge! In Particular to ICMA Centre students Kadi Huang, 2nd year Finance and Investment Banking, and Daniel Lim, 1st year Finance & Investment Banking. The semi-final was held at the offices of P&G (Procter & Gamble) in Weybridge and required the ten semi-finalists to purchase, renovate and manage a hotel business in Thailand.Tasks included corporate social responsibility, media presentation, creative thinking and networking. The Henley team produced an outstanding performance to win with a profit of £151K (moderated by a stakeholder engagement score).They will join nine finalists from other top business schools at the London HQ of IBM UK in Southbank on Friday 22 March for the chance to win up to £1000. We wish them the best of luck!