seasonal commodity futures trading strategy

Seasonal fluctuations are evident for umteen commodity prices. However, their exact size can be quite ambiguous. Thu, seasons involve commodity futures curves in two ways. First, they bias the expected futures price of a specified expiry month relative that of other months. Second, their uncertainty is an independent source of hazard that affects the overall risk premia priced into the curve. Integrating seasonal worker factor uncertainness into an transformation (linear) term structure model of commodity futures allows more living and granular estimates of various risk premia or 'cost-of-carry factors'. This can serve as basis for investors to decide whether to receive or wage the risk premia implied in the early bender.

Hevia. Constantino, Ivan Petrella and Martin Sola (2018), "Risk Premia and Seasonality in Trade good Futures", Border district 5, 2022.

The post ties in with SRSV's summary lecture on implicit subsidies, particularly the section on commodity futures markets.

The below are quotes from the paper. Emphasis and cursive text have been added.

Stochastic seasonal fluctuations

"Futures prices in many energy and agricultural commodities display seasonal worker fluctuations. Often, those fluctuations are not perfectly sure… Although it is common to mould seasonality as settled cycles, therein section we argue that… for a keep down of energy commodities (gasoil, gasolene, heating oil, and gas) and agricultural commodities (corn, soybean, and wheat)…those seasonal fluctuations are in fact stochastic. This differentiation is important because random seasonality implies an additive risk factor that affects risk premia…From the stand of market participants, stochastic seasonal fluctuations involve a author of risk that manifests itself in futures prices and risk premia."

"For most commodities and narrow down maturities, the tests powerfully reject the nada hypothesis of deterministic seasonality."

"We estimate the model of…commodity futures prices….for the full point Jan-1984 direct Apr-2017. We focus our analysis along heating oil [and]…on soybeans futures. The mold matches the cross-section of futures prices over time, including their seasonal pattern. We find strong evidence of random seasonality: the peaks and troughs of the seasonal cycle diverge over the years, and the bountifulness of the seasonal fluctuations decreased over time, particularly at the end of the sample. Consistent with the possibility of storage, the moderation of the estimated seasonal component coincides with a related palliation of the seasonal worker component in stocks of heating oil inventories."

"Correctly specifying seasonality in futures prices as stochastic is important mostly to nullify erroneously assigning those fluctuations to other risk factors. When we estimate the model imposing deterministic seasonality, the omitted time variation in the seasonal rule manifests itself as large fluctuations in the cost-of-convey factors which, successively, interpret into large and spurious fluctuations in estimated take a chanc premia."

A contain curve model

"The purpose of this paper is to develop and estimate an related model of futures prices that allows for stochastic variations in seasonality. We use the model to analyze the implications of stochastic seasonal fluctuations for the pricing of commodity futures and risk premia…Our model features stochastic seasonal fluctuations in both the cash price and the cost-of-take. By attaching market prices of risk to seasonal worker factors, we are able to measuring rod the risks associated with stochastic seasonal shocks."

"[We] consider a storable good with spot damage and with a web toll-of-carry, expressed as a incessantly compounded rate of the spot price. The net cost-of-carry represents the computer memory and insurance costs of physically holding the commodity earning of any convenience yield on inventory. It is the linear of the electronegative of the dividend yield of a hackneyed and can be derived from labyrinthine sense models."

"To capture seasonality in the cash price and the cost-of-transport, we assume that their loadings… are periodical functions of time… To extract the seasonality of a futures sign up with months to maturity, we reckon the prospective seasonal component at any time probationary on information at that time, and then breed the resulting expression by a discounting ingredien."

"We define the price-of-sway curve (net of adhesiveness yields) as a value that relates to the (log) difference between a futures price and a spot Price…[over and above] the yield on a zero-coupon slave…To infer the numerate of factors necessary to capture the variability of the cost-of-carry curve, we compute head components of log futures prices net of the contribution of the spot, seasonal, and yield slue factors."

"The [widely used] basic model of good futures assumes that a single factor drives variations in the price-of-carry… We develop and estimate a multifactor affine model of commodity futures that allows for stochastic seasonality…We reveal that, in fact, we need leastways three factors to properly calculate for the dynamics of the cost-of-carry."

Empirical findings

"We execute a principal components analysis on the cost-of-carry curve for each good. We conclude that we want at least three factors to appropriately account for the dynamics of the be-of-carry curve. The foremost three principal components account for 90 percent or less of the variableness of the monetary value-of-carry curve… The first chief component only accounts for between 16 and 80 percentage of the variability. These results suggest that a model in which the cost-of-pack depends on a unwed factor misses important features of the data."

"We verbalise various notions of risk premia in terms of the components of the affine model. Since all the strategies that we consider cost zero when they are entered into, ex-ante expected retrovert alone reflects expected risk premia… The spot agio is the due turn back of belongings a 1-period futures contract until maturity… The term agio is defined as the 1-period due holding return of an n-period futures contract in excess of the office premium."

"We measure the contribution of the different factors to risk premia. We find that most postgraduate frequency fluctuations in run a risk premia are due to variations in the cash price factor and other factors associated with the cost-of-carry curvature."

"We find out that [bond] yield curve factors have a significant impact connected risk premia, more often than not at intermediate and lower frequencies… When the pitch of the generate curve is positive, long terminal figure contracts are comparatively more expensive than shorter contracts while the reverse holds when the yield curve is inverted. Thus, changes in the slope of the yield curve o'er time affect futures prices and risk premia."