Journal
ENERGY ECONOMICS
Volume 107, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.eneco.2022.105854
Keywords
Correlations; Commodity markets; Momentum; Profits; Basis
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This paper uses a non-parametric model to examine time-varying correlations for energy and other commodities and finds that profits from a trading strategy that accounts for the patterns in correlations are higher than those that do not. Additionally, profits are asymmetric to higher and lower levels of correlation, and are largely explained by the basis and momentum factors, except for grains and softs portfolios at higher correlation levels.
This paper uses a non-parametric model to examine time-varying correlations for energy and other commodities and tests their economic importance by combining dynamic correlations with the momentum strategy. Our empirical analysis offers three new findings. First, the profits from a trading strategy that accounts for the patterns in correlations are higher than the profits that do not account for the time-varying correlations. Second, profits are asymmetric to higher and lower levels of correlation. Profits are maximized at higher levels of cor-relation. These profits are robust to the financialization period and the backwardation and contango phases of the commodity market. Finally, the economic source of profits reveals that profits are largely explained by the basis and momentum factors, the exception being grains and softs portfolios at higher correlation levels.
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