Exploiting the dynamics of commodity futures curves

TL;DR

This paper uses the Nelson-Siegel model to analyze commodity futures curves and develops new trading strategies based on their dynamics, which show significant profitability and robustness across different market conditions.

Contribution

It introduces novel investment strategies exploiting futures curve dynamics using Nelson-Siegel parameters, demonstrating their profitability and resilience.

Findings

Systematic slope-based strategies generate significant profits.

Profitability increases with investor sentiment and during economic slowdowns.

Strategies remain effective under various model specifications.

Abstract

The Nelson-Siegel framework is employed to model the term structure of commodity futures prices. Exploiting the information embedded in the level, slope and curvature parameters, we develop novel investment strategies that assume short-term continuation of recent parallel, slope or butterfly movements of futures curves. Systematic strategies based on the change in the slope generate significant profits that are unrelated to previously documented risk factors and can survive reasonable transaction costs. Further analysis demonstrates that the profitability of the slope strategy increases with investor sentiment and is in part a compensation for the drawdowns incurred during economic slowdowns. The profitability can also be magnified through timing and persists under alternative specifications of the Nelson-Siegel model.