2015-10: Microscopic momentum in commodity futures (Working paper)

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Author(s)
Bianchi, Robert J.
Drew, Michael E.
Fan, John H.
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Neupane, Suman

Roca, Eduardo

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2015
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47 pages

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Abstract

Conventional momentum strategies rely on 12 months of past returns for portfolio formation. Novy-Marx (2012) shows that the intermediate return momentum strategy formed using only twelve to seven months of returns prior to portfolio formation significantly outperforms the recent return momentum formed using six to two month returns prior. This paper proposes a more granular strategy termed 'microscopic momentum', which further decomposes the intermediate and recent return momentum into single-month momentum components. The novel decomposition reveals that a microscopic momentum strategy generates persistent economic profits even after controlling for sector-specific or month-of-year commodity seasonality effects. Moreover, we show that the intermediate return momentum in the commodity futures must be considered largely illusory, and all 12 months of past returns play important roles in determining the conventional momentum profits.

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Copyright © 2010 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s).

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Finance

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Subject

G11 - Portfolio Choice; Investment Decisions

G14 - Information and Market Efficiency; Event Studies

G13 - Contingent Pricing; Futures Pricing; option pricing

Commodity Futures

Conventional Momentum

Echo

Microscopic Momentum

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