Time-varying conditional profitability of momentum strategies in commodity futures market: Evidence from India

Abstract

Manuscript type: Research paper Research aims: This study aims to provide fresh evidence on the presence of momentum profitability in the commodity futures market of India. Design/Methodology/Approach: The sample of this study consists of highly traded commodity futures contracts taken from the commodity market of India over the period of 2006-2017. This study applies the conditional multi-factor model to test the time-varying performance of the momentum strategies. Research findings: This study confirms the existence of exceptionally high abnormal momentum profitability in the commodity futures market despite the consideration of transaction costs. However, subsample analysis and the application of conditional multi-factor model suggest that momentum profits are essentially time-varying. The low and insignificant correlation of momentum portfolios with stocks and bonds confirm that the relative strength of the momentum portfolios of commodity futures are part of an effective strategy to create a welldiversified portfolio. Theoretical contribution/Originality: This study examines the timevarying conditional profitability of momentum strategies for the commodity futures market of emerging economies such as India. The outcome enriches the small group of contemporary studies that have been conducted on commodity futures in relation to India. The most significant contribution of this study is the use of a conditional multi-factor model which assesses the possible role of time-varying conditional alphas and betas in defining the momentum payoffs in the commodity futures market in India. Practitioner/Policy implication: Policymakers should consider developing more lucrative policies which can attract institutional investors to the commodity market of India. This is because the domestic and foreign institutional investors are central to the enhancement and stability of the financial market. It is imperative to create awareness about the exceptionally high abnormal profits generating potential of the commodity futures that are used by professional money managers simply as a tool for price risk management. Research limitations: This study uses 13 highly traded commodity futures contracts of India to design the momentum strategies. The robustness of the high abnormal returns provided by these strategies can be further investigated through an extended study period, and by including medium and less liquid commodity futures contracts to create the momentum strategies. © 2020, University of Malaya. All rights reserved.