Momentum Strategies in Commodity Futures Market: A Quantitative study

Abstract: This study employs a quantitative approach to investigate the momentum phenomenon in the commodity futures market. The study captures the phenomenon using two momentum indicators, namely, MACD and RSI, and extends the scope of indicator utilization to both joint and single usage. The research aims to explore whether portfolios consisting of these indicators can generate abnormal returns in the commodity futures market, in comparison to the S&P GSCI, which was used as the benchmark index. The study uses accumulated data from 2010 to 2019, with portfolios constructed on a quarterly basis. Statistical significance determination is executed by exporting the data to Stata, where the normality distribution is ascertained using the Shapiro-Wilk test. This was later followed by t-tests in order to dictate statistical significance on each portfolio compared to the S&P GSCI. The study reveals empirical evidence to support two of the three strategies, namely, the joint use of the aforementioned momentum indicators and single use of the RSI momentum indicator. However, the accumulated yield of the portfolio provided insufficient results to conclude the statistical significance of the single use of the MACD momentum indicator. The authors derive these results and observed phenomena from several financial theories, which are divided into three main sections in the theoretical framework, including information-based, risk-based, and behavior-based explanations. Relevant theories are included to support the research at hand. Furthermore, the authors incorporate the Efficient Market Hypothesis (EMH) under the pretense of challenging its view on efficient markets. They do so by constructing portfolios which yield abnormal returns and subsequently question the notion of efficient markets. The authors deduct that their findings produce some evidence to support the absence of strong form and semi-strong form of market efficiency in the commodity futures market. Overall, this study provides valuable insights into the momentum phenomenon in the commodity futures market and different incorporating investment techniques in which they are utilized. The ways in which momentum strategies can be utilized and momentum indicators interpreted, as displayed in this thesis, presents practical implications for investors and financial professionals.