The author discusses how sustainability has hit center stage across all economic sectors, including in commodities. Banks are making environmental, social and governance (ESG) issues much more of a priority and are diversifying their offerings to include ESG investment products.
Part 2: Trend’s Not Dead (It’s Just Moved to a Trendier Neighborhood)
By Thomas Babbedge, Ph.D., Chief Scientist and Deputy Head of Systematic Strategies, Gresham Investment Management and J. Scott Kerson, Senior Managing Director and Head of Systematic Strategies, Gresham Investment Management
This paper is the second in a two-part series. In part 1, which appeared in the Winter 2019 edition of the GCARD, the authors explored the reduced performance of trend followers over the past decade. In Part 2, the authors use a novel dataset of alternative commodity markets to show that the “trendiness” of less mainstream markets, selected based on a set of simple criteria, is inherently higher and that trend following in these markets has continued to be significantly better.
Machine Learning – A Machine’s Perspective on Positioning
By Mark Keenan, Head of Research and Strategy at Engelhart Commodity Trading Partners and Member of the GCARD’s Editorial Advisory Board
This digest article discusses how machine learning can be applied to studying positioning dynamics in commodities. The article introduces decision trees and random forests as ways of potentially uncovering relationships between changes in positioning and changes in commodity prices.
The Big Oil Short: This Time is Different
By Jan-Hein Jesse, Founder, JOSCO Energy Finance and Strategy Consultancy, Netherlands and Member of the GCARD’s Editorial Advisory Board
The author argues that while oil markets should recover from the extreme price lows that have been due to simultaneous supply-and-demand shocks, difficult structural changes will remain for the global oil industry. The author reviews the history of Investment and Exploitation phases in the oil markets, and then notes how this time may be different because of pressures to substitute away from oil, especially in Europe.
Commodity Consequences of the U.S.-China Trade Disputes
By Colin M. Waugh, Member of the GCARD’s Editorial Advisory Board
The author observes that 2020 will be a crucial year for both the U.S. and China in stabilizing and redefining their domestic political arrangements as well as in their commercial and political relations with each other. In addition to providing a historical framework for analysis of the past two-plus years of the U.S.-China trade “war,” the author discusses the dispute’s impact on commodity supply chains.
Forecasting Crude Oil and Reﬁned Products Volatilities and Correlations: New Evidence from Fractionally-Integrated Multivariate GARCH Models
Research by Malvina Marchese, Ph.D., Michael Tamvakis, Ph.D., Ioannis Kyriakou, Ph.D., Cass Business School, City University of London, U.K. and Francesca Di Iorio, Ph.D., Dipartimento di Scienze Politiche, Universita’ Degli Studi di Napoli Federico II, Italy
This paper advocates the use of long-memory multivariate GARCH models to forecast spot return volatilities and correlations for crude oil and related products. The paper provides useful insights to non-commercial oil traders and other energy markets agents engaged in hedging and risk management operations.
Futures Trading and the Excess Co-movement of Commodity Prices
Research by Yannick Le Pen, Ph.D., Université Paris-Dauphine, Université PSL, France and Benoît Sévi, Ph.D., Université de Nantes, France
The authors empirically reinvestigate the issue of the excess co-movement of commodity prices. Excess co-movement appears when commodity prices remain correlated even after adjusting for the impact of fundamentals. They show that speculative intensity is a driver of the estimated excess co-movement, as speculative trading is both correlated across commodity futures markets and correlated with futures prices.
The Price of Shelter – Downside Risk Reduction with Precious Metals
Research by Don Bredin, Ph.D., Thomas Conlon, Ph.D. and Valerio Potì, Ph.D., Smurfit Graduate School of Business, University College Dublin, Ireland
This article examines the potential to reduce downside risk by adding precious metals to a portfolio consisting of traditional assets. The paper shows that gold, silver and platinum contribute to downside risk reduction at short horizons, but diversification into silver and platinum may result in increased long horizon portfolio risk.
Investable Commodity Premia in China
Research by Robert Bianchi, Ph.D., John Hua Fan, Ph.D. and Tingxi Zhang, Griffith Business School, Griffith University, Australia
This paper discusses how investable Chinese commodity risk premia might be, amid the recent acceleration of the market opening process in China. The investable premia documented in this paper survive execution delay, stop-loss, seasonality, sub-periods, illiquidity and transaction cost tests, and provide portfolio diversification benefits. Finally, the paper’s analysis reveals that investable commodity premia in China exhibit a strong ability to predict global real economic growth.
Fear of Hazards in Commodity Markets
Research by Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City University of London, U.K.; Marcos Gonzalez-Fernandez, Ph.D., University of León, Spain and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France
This paper examines the predictive content of active attention to “hazard fear” which is proxied by changes in the volume of internet search queries (or “active attention”) by 149 weather, disease, geopolitical or economic terms. A long-short portfolio strategy that sorts the cross-section of commodity futures by a hazard fear signal – inferred from the co-movement of past excess returns with “active attention” – is able to capture an economically and statistically significant premium. The hazard fear premium is significantly greater in periods of higher financial investor pessimism which reveals a channel for the transmission of sentiment to commodity futures markets.