Factor Momentum in Commodity Futures Markets

This paper examines the factor momentum in commodity futures markets. Based on the US and UK data from 1985 to 2022, we first show that a commodity factor's past returns positively predict its future returns. This predictability is at its strongest over the 1-month horizon, and could be explained by mispricing. The factor momentum suggests mean-variance inefficient commodity factors and negatively impacts the efficiency of pricing models. We then construct the time-series efficient factors, which exhibit higher Sharpe ratios and improve the performance of pricing models. These findings are robust across international commodity futures markets, but the transaction costs erode the economic gains of factor momentum and efficient factor strategies due to high portfolio turnover. Overall, our results point to the potential to time commodity factors and highlight the importance of conditional asset pricing in commodity futures markets.