Adrian Fernandez-Perez

Commodity Strategies Based on Momentum, Term Structure and Idiosyncratic Volatility

This paper studies the relationship between lagged idiosyncratic volatility and subsequent returns in commodity futures markets. Th e negative pattern observed in international equity markets by Ang et al. (2006, 2 009) prevails in commodity futures markets too, suggesting that it may relate to a yet -to-be-specified risk factor that is pervasive across markets. Systematically buying com m dities with low idiosyncratic volatility and shorting commodities with high idios yncratic volatility generates an average alpha of 4.62% a year. Idiosyncratic volati lity signals appear more robust to extreme market volatility conditions than momentum and/or term structure signals. Robustness tests show that the profitability of idi osyncratic volatility signals is not an artifact of transaction costs, illiquidity or data mining. They are neither a mere compensation for backwardation and contango nor a m anifestation of overreaction.This article demonstrates that momentum, term structure, and idiosyncratic volatility signals in commodity futures markets are not overlapping, which inspires a novel triple‐screen strategy. We show that simultaneously buying contracts with high past performance, high roll‐yields, and low idiosyncratic volatility, and shorting contracts with poor past performance, low roll‐yields, and high idiosyncratic volatility yields a Sharpe ratio over the 1985 to 2011 period that is five times that of the S&P‐GSCI. The triple‐screen strategy dominates the double‐screen and individual strategies and this outcome cannot be attributed to overreaction, liquidity risk, transaction costs, or the financialization of commodity futures markets.

When no news is good news – The decrease in investor fear after the FOMC announcement

We examine the impact of Federal Open Market Committee announcements on the intraday dynamics of the VIX and VIX futures. We find that at the time of the announcement the VIX and VIX futures decline significantly. We observe that the decline in the VIX and VIX futures after the announcement is not instantaneous but gradual, lasting for about 45min. The magnitude of the decline in the VIX and VIX futures is strongly negatively related to an increase in realized volatility at the time of the announcement. Finally, we explore the potential economic profits that could be obtained from the observed reaction of the VIX futures to the announcement, and show that a strategy that goes short in the nearest term VIX future at the start of a trading day and closes out at the end of that day generates an average return of 10% p.a.

The Case for Long-Short Commodity Investing

Johnson and his colleagues at CME Group for useful comments. I acknowledge financial support from CME Group. This article presents my views, conclusions and recommendations and are not necessarily those of CME Group. The opinions expressed in this study are those of the authors and do not necessarily reflect those of EDHEC Business School.

The Pricing of Skewness in Commodity Futures Markets: Risk or Lottery?

This article studies the relation between the skewness of commodity futures returns and expected returns. A trading strategy that takes long positions in commodity futures with the most negative skew and shorts those with the most positive skew generates significant excess returns that remain after controlling for exposure to well-known risk factors. A tradeable skewness factor explains the cross-section of commodity futures returns beyond exposures to standard risk premia. The impact that skewness has on future returns is explained by investors’ preferences for skewness under cumulative prospect theory and selective hedging practices.

Detecting trends in the foreign exchange markets

We test for the existence of trends in exchange-rate series for 95 currencies against the US dollar. To that end, we make use of Taylors (1980) price trend model that, instead of focusing on the mean reverting behaviour of exchange rates measured over a long horizon, concentrates on the short-term pattern of the price trend. Employing a maximum likelihood method and a genetic algorithm to estimate the model parameters, in 39 of the 95 cases considered we find evidence in favour of the presence of trends, the trends being more frequent in intermediate exchange-rate regimes.

Exploiting trends in the foreign exchange markets

We offer further evidence on the relevance of technical trading in exchange-rate markets using daily data for 95 currencies against the US dollar. To that end, we investigate the profitability of a simple technical trading rule based on Taylors (1980) price trend model, generating optimal one-step-ahead forecasts of returns using genetic algorithms. These trading rules, that bear similarity to the popular trading rules based on moving averages, overcome the buy-and-hold strategy in 25 of 39 cases where trends are detected, even in the presence of transaction costs.

Fear connectedness among asset classes

This study investigates the interconnection between five implied volatility indices representative of different financial markets during the period August 1, 2008-September 9, 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate both the net directional connectedness for each market and all net pair-wise directional connectedness. Our results suggest that slightly more than only 38.22%, of the total variance of the forecast errors is explained by shocks across markets, indicating that the remainder 61.78% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Precious metals, oil and the exchange rate: contemporaneous spillovers

ABSTRACT We investigate the contemporaneous spillovers among precious metals, crude oil and the US

La estructura temporal de los tipos de interés: conceptos y procedimientos de estimación

exchange rate. We contend that conventional reduced-form vector autoregressive (VAR) models based on lead/lag relations do not fully capture the interactions among these series as these models ignore the contemporaneous effects. Using a Structural VAR model, we identify these contemporaneous spillovers, which are shown to be strong and asymmetric. We further show that not taking into consideration the contemporaneous interactions among these assets leads to inaccurate findings and inevitably to inaccurate interpretations of the causal relations among them.

The Intraday Properties of the VIX and the VXO

espanolEn este trabajo hemos pretendido ofrecer una vision general sobre la estructura temporal de tipos de interes (ETTI). Con dicho proposito, hemos comenzado explicando el significado economico de la ETTI, para posteriormente hacer una revision de los modelos de su estimacion mas empleados en la literatura, asi como de las diferentes hipotesis sobre su forma. EnglishThe paper reviews the literature on the term structure of interest rates (TSIR). This was done by defining the concept, explaining its use, and detailing the methodologies employed to derive the TSIR. We also put forward theoretical rationales on its model.En este trabajo hemos pretendido ofrecer una vision general sobre la estructura temporal de tipos de interes (ETTI). Con dicho proposito, hemos comenzado explicando el significado economico de la ETTI, para posteriormente hacer una revision de los modelos de su estimacion mas empleados en la literatura, asi como de las diferentes hipotesis sobre su forma.