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2023 | OriginalPaper | Chapter

5. Systematic Risk Premia Strategies

Author : Ilia Bouchouev

Published in: Virtual Barrels

Publisher: Springer Nature Switzerland

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Abstract

This chapter is devoted to systematic quantitative funds, known as commodity trading advisors (CTAs) or simply as algos. These traders tend to look at markets through the lenses of risk premia, such as momentum, carry, and value. We discuss how the source of these risk premia in the oil market is ultimately linked to the theory of storage. Important concepts of signal blending and the reaction function are introduced.

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Footnotes
1
See Weymar (1965). In addition to empirical study of cocoa prices using fundamental data, Weymar developed one of the first theoretical models of storage, which links prices and inventories via coupled differential equations.
 
2
The fund’s trading roster included the names of Paul Tudor Jones, Louis Bacon, and Bruce Kovner, who subsequently became trading legends in their own right, creating multi-billion dollar hedge funds known to be among the largest commodity traders. Jones founded Tudor Investment Corporation, Bacon is the founder of Moore Capital Management, and Kovner established Caxton Associates. More details about the history of Commodity Corp. are provided in Tully (1981) and Lux (2003).
 
3
While the literature on long-short commodity risk premia portfolios is broad, we highlight the following work by Szymanowska et al. (2014), Daskalaki et al. (2014), Fernandez-Perez et al. (2018), Bakshi et al. (2019), and Boons and Prado (2019). See also Miffre (2016) for a comprehensive survey of empirical results and additional references on long-short commodity portfolios.
 
4
For brevity, when defining the trading signal with the sign function we assume that sign(0) = +1, which ensures that either a long or a short position is held on each trading day.
 
5
RBOB stands for Reformulated Blendstock for Oxygenate Blending. It represents a primary blending component used to create the finished gasoline product. Even though RBOB does not represent the finished product, it is widely used as the most liquid benchmark for gasoline prices in the futures market.
 
6
In general, the term information ratio is used to measure the performance of the strategy relative to a certain benchmark. It is analogous to the conventional Sharpe ratio if the risk-free return is replaced with the return on the benchmark. Since trading futures does not require much initial capital, the benchmark for most strategies is typically set at zero. Therefore, here the information ratio is simply defined as the ratio of the strategy’s annualized return to its annualized volatility, and, for convenience, we use the term information ratio interchangeably with the Sharpe ratio.
 
7
The empirical performance of the broad cross-asset carry portfolio is presented in Koijen et al. (2018).
 
8
Till (2022) showed that a dynamic strategy that replaces a conventional 60–40 equity-bond portfolio with a 30–40–30 equity-bond-oil futures portfolio when oil carry is positive significantly outperforms the static 60–40 portfolio.
 
Literature
go back to reference Bakshi, G., Gao, X., & Rossi, A. G. (2019). Understanding the sources of risk underlying the cross section of commodity returns. Management Science, 65(2), 619–641.CrossRef Bakshi, G., Gao, X., & Rossi, A. G. (2019). Understanding the sources of risk underlying the cross section of commodity returns. Management Science, 65(2), 619–641.CrossRef
go back to reference Boons, M., & Prado, M. P. (2019). Basis-momentum. The Journal of Finance, 74(1), 239–279.CrossRef Boons, M., & Prado, M. P. (2019). Basis-momentum. The Journal of Finance, 74(1), 239–279.CrossRef
go back to reference Daskalaki, C., Kostakis, A., & Skiadopoulos, G. (2014). Are there common factors in individual commodity futures returns? Journal of Banking and Finance, 40, 346–363.CrossRef Daskalaki, C., Kostakis, A., & Skiadopoulos, G. (2014). Are there common factors in individual commodity futures returns? Journal of Banking and Finance, 40, 346–363.CrossRef
go back to reference Fernandez-Perez, A., Frijns, B., Fuertes, A.-M., & Miffre, J. (2018). The skewness of commodity futures returns. The Journal of Banking and Finance, 86, 143–158.CrossRef Fernandez-Perez, A., Frijns, B., Fuertes, A.-M., & Miffre, J. (2018). The skewness of commodity futures returns. The Journal of Banking and Finance, 86, 143–158.CrossRef
go back to reference Koijen, R. S. J., Moskovitz, T. J., Pedersen, L. H., & Vrugt, E. B. (2018). Carry. Journal of Financial Economics, 127, 197–225.CrossRef Koijen, R. S. J., Moskovitz, T. J., Pedersen, L. H., & Vrugt, E. B. (2018). Carry. Journal of Financial Economics, 127, 197–225.CrossRef
go back to reference Lux, H. (2003, February 1). What becomes a legend? Institutional Investor. Lux, H. (2003, February 1). What becomes a legend? Institutional Investor.
go back to reference Miffre, J. (2016). Long-short commodity investing: A review of the literature. Journal of Commodity Markets, 1(1), 3–13.CrossRef Miffre, J. (2016). Long-short commodity investing: A review of the literature. Journal of Commodity Markets, 1(1), 3–13.CrossRef
go back to reference Szymanowska, M., De Roon, F., Nijman, T., & Van Den Goorbergh, R. (2014). An anatomy of commodity futures risk premia. The Journal of Finance, 69(1), 453–482.CrossRef Szymanowska, M., De Roon, F., Nijman, T., & Van Den Goorbergh, R. (2014). An anatomy of commodity futures risk premia. The Journal of Finance, 69(1), 453–482.CrossRef
go back to reference Till, H. (2022, Winter). Commodities, crude oil, and diversified portfolios. Global Commodities Applied Research Digest, 7(2), 65–74. Till, H. (2022, Winter). Commodities, crude oil, and diversified portfolios. Global Commodities Applied Research Digest, 7(2), 65–74.
go back to reference Tully, S. (1981, February 9). Princeton’s rich commodity scholars. Fortune. Tully, S. (1981, February 9). Princeton’s rich commodity scholars. Fortune.
go back to reference Weymar, F. H. (1965). The dynamics of the world cocoa market. Ph.D. Thesis, Massachusetts Institute of Technology. Weymar, F. H. (1965). The dynamics of the world cocoa market. Ph.D. Thesis, Massachusetts Institute of Technology.
Metadata
Title
Systematic Risk Premia Strategies
Author
Ilia Bouchouev
Copyright Year
2023
DOI
https://doi.org/10.1007/978-3-031-36151-7_5