An analysis of commodity markets: What gain for investors?

• Published in: Journal of banking & finance Vol. 37; no. 10; pp. 3878 - 3889
• Main Authors: Narayan, Paresh Kumar, Narayan, Seema, Sharma, Susan Sunila
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.10.2013; Elsevier Sequoia S.A
• Subjects: Commodities; Commodities trading; Commodity futures; Commodity market; Commodity markets; Commodity spot; Econometrics; Economic theory; Financial crisis; Futures market; Investment policy; Investors; Profit; Profitability; Profits; Studies; Trading strategies; Commodity spot; C22; G11; Trading strategies; Profits; G17; Commodity futures
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2013.07.009

•We study whether commodity futures market predicts the commodity spot market.•Using historical daily data, we find that they do.•We show how investors can use this information on the futures market to devise trading strategies.•Dynamic trading strategies suggest that all commodities are profitable.•We discover that profits are dependent on structural breaks. In this paper we study whether the commodity futures market predicts the commodity spot market. Using historical daily data on four commodities—oil, gold, platinum, and silver—we find that they do. We then show how investors can use this information on the futures market to devise trading strategies and make profits. In particular, dynamic trading strategies based on a mean–variance investor framework produce somewhat different results compared with those based on technical trading rules. Dynamic trading strategies suggest that all commodities are profitable and profits are dependent on structural breaks. The most recent global financial crisis marked a period in which commodity profits were the weakest.