Comparing different economic linkages among commodity futures

Chng, Michael T. 2010, Comparing different economic linkages among commodity futures, Journal of business finance & accounting, vol. 37, no. 9-10, November - December, pp. 1348-1389, doi: 10.1111/j.1468-5957.2010.02221.x.

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Title Comparing different economic linkages among commodity futures
Author(s) Chng, Michael T.
Journal name Journal of business finance & accounting
Volume number 37
Issue number 9-10
Season November - December
Start page 1348
End page 1389
Total pages 12
Publisher Blackwell Publishing
Place of publication Oxford, England
Publication date 2010-11
ISSN 0306-686X
Keyword(s) return
commodity futures
Summary Gasoline (GA) and kerosene (KO) are extracted from crude oil (CO), such that the three fuel commodities share a chemical link. On the other hand, GA also shares an industrial link with natural rubber (NR) and palladium (PA) as complementary commodities that are heavily consumed by the automobile industry. We contrast the information content embedded in the two economic linkages. Focusing on TOCOM futures contracts written on the five commodities and centering on GA, we confirm that incremental information provided by either CO, KO or NR, PA over a buy-and-hold strategy and a naive forecast, are both statistically and economically significant. While the chemical link forecast is more profitable, a double-link forecast generated from a VECM with two cointegrating vectors (KO-GA and GANR prices) outperforms both single-link forecasts based on risk-adjusted profit net of transaction costs. Further comparisons against the profitability of commodity-based momentum strategies documented in Erb and Harvey (2006) and Miffre and Rallis (2007) show that the double-link forecast holds its own against the most profitable of the 75 momentum strategies considered. This strongly suggests that not only are there incremental profits to be gained from harnessing and combining economic links among commodity futures, the resultant incremental profits are economically significant against other proven commodity-based trading strategies in the existing literature.
Language eng
DOI 10.1111/j.1468-5957.2010.02221.x
Field of Research 150201 Finance
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2010, Blackwell Publishing Ltd
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Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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