Volatility Managed Momentum Portfolios in Commodity Markets

Absztrakt (kivonat)

The momentum strategies perform well across asset classes however, the stellar performance of momentum trading comes with periodic crashes that wipe out the accumulated returns. Based on previous works on the topic, I compare three volatility-scaled strategies in the US commodity futures market, namely the constant volatility scaled, the dynamic volatility scaled, and my enhanced dynamic volatility scaled momentum strategies. The implementation of the scalings enhances the returns of the portfolios and also reduces the skewness of the return distribution. A deeper examination reveals that the characteristics of the crashes are different from the ones usually experienced in equity markets. In commodity markets, the crashes tend to happen more frequently but they are smaller in absolute terms hence implementing risk management into portfolios achieves better results on a longer time horizon.