Effect of Maturity Structure of Roll Yields in Commodity Futures Strategies

Related to multiple commodity futures long/short strategies, mainly to term-structure based strategies (like #22 – Term Structure Effect in Commodities) …

Authors: Ghoddusi

Title: Maturity Structure of Commodity Roll Strategies: Evidence from the Energy Futures

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820228


We investigate the maturity-structure of roll strategy returns in the energy futures markets. Our innovation is to report and analyze the risk/return profile, the Sharpe ratio, and the asset pricing loadings of rollover strategies based on futures contracts of the same underlying commodity but with maturities between two and 12 months. We find that a conditional rollover strategy, which takes a long position in backwardation and a short position in contango, delivers the highest Sharpe ratio for all commodities. While we don't observe a significant difference in terms of asset pricing beta for different roll positions, the Sharpe ratio tends to be higher for contracts with a shorter time to maturity. We also report some distinct patterns of maturity-structure across energy commodities. Findings of the paper have implications for managing commodity-based investments.

Notable quotations from the academic research paper:

"The rollover (or roll) strategy includes entering a futures contract with a given time-to-maturity, holding the futures contracts for a certain time period (typically for one month), and then closing the position to realize the return generated by changes in the price of the underlying futures contract. The investor then opens a new futures contract position (with the same time-to-maturity as before) and repeats the strategy.

The main contribution of the current paper is to examine the performance of rollover strategies de ned on futures contracts with di fferent time-to-maturity or what we call maturity structure of roll yields. By allowing the investment strategy to enter and exit futures contracts beyond the front month and to hold the contract for a time shorter than its maturity, we construct the maturity structure and discuss its properties for the ve selected commodities.

We document a monotonic relationship between the length of futures contracts and three key measures: the average return, the volatility of returns, and the Sharpe ratio. The results are robust for all commodities. The average return and volatility curves all decline with the length of the futures contract. However, the slope of the Sharpe ratio curve depends on the investment strategy chosen. For unconditional investment strategies the slope is positive, meaning that the further into the future the maturity date of the futures contracts, the higher is the Sharpe ratio. The relationship gets reversed when the investment position is conditioned on the slope of the forward curve."

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