Enhanced momentum strategies in commodity futures market

Abstract

Momentum strategy, a well-known anomaly in finance, can experience large drawdowns and negative skewness. This paper examines and compares momentum decomposition and volatility-scaled momentum strategies in the commodity futures market to improve the weakness of momentum: high-to-price(HTP), price-to-high(PTH), constant volatility-scaled momentum(cMOM), constant semi-volatility-scaled momentum(sMOM), and dynamic-scaled momentum(dMOM). The main findings are as follows: First, we find that HTP, cMOM, sMOM, and dMOM lead to higher Sharpe ratios compared to MOM and mitigate the negative skewness. Proposed momentum strategies demonstrate positive and significant alpha compared to the market factor, and volatility-managed approaches also reduce momentum crashes. Second, returns of MOM, PTH, cMOM, and sMOM are related with continued market states, and HTP is associated with investors’ underreaction and information diffusion mechanism. Finally, we can implement the enhanced strategies in commodity futures market even when leverage constraints exist.