Profitability and diversification benefits of momentum strategies on commodity index futures

Abstract

This paper examines the profitability and diversification benefits of momentum strategies in commodity futures markets. The results indicate that momentum strategies on the Goldman Sachs Commodity Index (GSCI) futures provide positive abnormal returns for short and intermediate time horizons. Over the period 1998 to 2006, the momentum strategies are found to generate an average annual return of about 9%. We also find that the commodity-based momentum strategies have low correlations with stock and bond returns, and moreover, provide superior returns during stock market downturns. Thus, our findings demonstrate that simplistic momentum strategies on commodity index futures may provide attractive diversification opportunities for investors.commodity index futures; momentum strategies; portfolio diversification; profitability; abnormal returns.