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Have trend-following signals in commodity futures markets become less reliable in recent years?

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  • Benjamin R. Auer

    (Brandenburg University of Technology Cottbus-Senftenberg
    University of Leipzig
    CESifo Munich)

Abstract

Various trend-following trading rules have been shown to be valuable for predicting market directions and thus the formulation of investment strategies. However, recent equity market research has provided striking evidence that the predictive power of such rules appears to diminish over time due to increased investor attention and lowered arbitrage barriers. Given that trend-following rules are also very successful and have been widely used in futures markets, we analyze whether a similar effect can be observed for commodity futures contracts. Using a trend regression approach based on time-varying success ratios, we detect significantly higher predictive accuracy for cross-sectional than for time-series strategies. In addition, with the exception of a few commodities, we find no significant trending behavior in trading rule reliability. These results, which are robust in a variety of settings, indicate strong momentum stability in futures markets and justify the application of this class of trading rules in commodity futures investing.

Suggested Citation

  • Benjamin R. Auer, 2021. "Have trend-following signals in commodity futures markets become less reliable in recent years?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(4), pages 533-553, December.
    • Handle: RePEc:kap:fmktpm:v:35:y:2021:i:4:d:10.1007_s11408-021-00385-5
    DOI: 10.1007/s11408-021-00385-5
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    More about this item

    Keywords

    Trend-following rules; Moving averages; Momentum; Trends; Commodity futures;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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