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In this issue of the GCARD, we have the immense privilege of interviewing Blythe Masters, a former senior J.P. Morgan executive, who has distinguished herself as a thought leader and innovator across many disciplines, including in derivatives, commodities, and in digital asset technology.
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This report describes research conducted on entering orders manually and automatically in commodity futures markets in the United States to determine how technological change is affecting futures trading.
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Managing a commodity portfolio is not particularly easy because commodities markets respond to idiosyncratic features, which cannot be found in equities, nor in the fixed income markets. In fact, their response to changes in the macroeconomic, financial and geopolitical landscapes might considerably differ from one commodity to another. In order to better address these problems, this paper examines four important aspects of commodity portfolio management: (1) commodity market returns; (2) commodity volatilities; (3) commodity seasonal volatility; and (4) trend and mean reversion.
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In Part 1 of 2, we explore the reduced performance of trend followers over the past decade but fail to find evidence that this is due to the commonly proffered reason of overcrowding of the strategy. Instead we find that the cause can be laid at the feet of the markets themselves – those markets commonly traded by trend followers have simply not trended as strongly in the past decade. In Part 2 we will turn our attention to the “trendiness” of a novel dataset of alternative commodity markets, selected based on a set of simple criteria. This will feature in a forthcoming edition of the GCARD.
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The nature of price formation in the global Liquefied Natural Gas (LNG) market is increasingly the subject of both industry and academic attention. As the market shows greater appetite to gradually transition from oil indexation towards gas-to-gas pricing, many alternative price references have emerged as regional price signals, reflecting their respective markets. The article examines, from a market microstructure prospective, how a new U.S. business model is altering the structure of LNG trading transactions and subsequently positioning the U.S. to be the most likely anchor for price formation for the global LNG market.
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This article notes that investors in general remain wary of investing in oil especially if returns are likely to be challenged by the peak demand theory, or low-cost shale production in the medium term, or oil producers shifting their extraction of resources ahead of any pre-announced implementation of climate-based policies. Given the lack of investments in the sector and demand for oil being driven predominantly by non-OECD economies where population growth is on the rise, oil as an asset class could end up providing positive returns. Additionally, geopolitics will always be core to oil at least in the next decade.
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This article describes risk premia strategies and notes how commodity risk premia strategies are an extension of ideas that originated in the equity markets. The paper then covers various techniques which attempt to minimize the inevitable losses that can arise from such strategies. The article concludes with several hypotheses on why commodity risk premia strategies have historically earned high average returns and does so by identifying the risk exposures that investors are taking on and for which they need to be compensated.
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As summarized by Xiao Qiao, Ph.D., Paraconic Technologies US Inc. and Member of the GCARD’s Editorial Advisory Board
This digest article examines the behavior of futures prices and trader positions around price limits in commodity futures markets. The authors ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of non-commercial market participants (speculators). The paper finds little evidence that limit events are the result of speculative activity, but instead are associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts, price discovery migrates to options markets, but option prices provide a biased estimate of subsequent futures prices when trading resumes.
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As summarized by John Hua Fan, Ph.D., Griffith Business School, Australia
This digest article examines systematic investment strategies in the Chinese commodity futures market. The paper’s results indicate that momentum and term structure strategies generate statistically significant profits across the futures curve, in the most liquid markets and in randomly selected sectors. In addition, the paper presents a head-to-head comparison of the important institutional settings with the U.S. market.
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As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board
This digest article examines the information content of futures markets speculators’ net positions. The article shows that long-short portfolios based on speculative pressure capture attractive premia in commodity, equity and currency futures markets. The thus formed speculative pressure factors are able to explain the cross-section variation in futures returns after controlling for tradeable (carry, momentum and value) factors and non-tradeable global macroeconomic factors.
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