Price Momentum
Price momentum in futures markets was analyzed in a recent paper. In the conclusion wise points were raised regarding hedgers:
“The trend-following profits we document are unlikely to be explainable by known risk factors, and are too large to be subsumed by the relatively low transactions costs in futures markets. Our results incorporating past trading volume show that, unlike in the stock market, volume adds little information; that is, when we control for past return momentum, there generally are no significant differences in the realized returns of high vs. low volume commodities. However, when we examine the temporal relations between net long positions by trader type and trading rule indicators, some very interesting findings emerge. We find strong evidence that, in most futures markets, commercial traders are contrarians, and that non-commercial traders use trend-following strategies in the aggregate. While the latter finding was expected, given the prevalence of managed futures funds and commodity pools among reporting noncommercial traders during the 1986-2003 period, the stylized fact that in most markets it is the commercial traders (and not, for the most part, the non-reporting traders) that are contrarians in the aggregate is surprising. While these findings suggest that momentum profits are being driven by hedging pressure, it is not immediately obvious why these large, presumably knowledgeable commercial traders are employing contrarian trading strategies when these strategies are unprofitable on average. Are they rationally reducing their risk in some way by doing so? Or are commercial traders contrarians because they are succumbing to behavioral biases such as loss aversion and/or the tendency to lock-in favorable commodity prices too soon?”
Qian Shen
Department of Economics
Alabama A&M University
Andrew C. Szakmary
Department of Finance
University of Richmond
Subhash C. Sharma
Department of Economics
Southern Illinois University at Carbondale
