Skewness Strategies in Commodity Futures Markets

Adrian Fernandez-Perez, Bart Frijns, Ana-Maria Fuertes, Joëlle Miffre: Investors are known to display a preference for equities with positive skews (or lottery-like payoffs) and an aversion to equities with negative skews (or those for which the probability of large losses is higher than that of similar large gains).

Author(s):

Adrian Fernandez-Perez

Auckland University of Technology

Bart Frijns

Auckland University of Technology

Ana-Maria Fuertes

Cass Business School

Joelle Miffre

EDHEC Business School, EDHEC-Risk Institute

As a result, equities with positive skews tend to be overpriced and thus offer low expected returns, while equities with negative skews tend to be underpriced and thus offer high expected returns. While the pattern is well documented in the equity market literature (see, for example, Amaya et al., 2015, for some recent evidence), the question as to whether skewness matters to the pricing of commodity futures has not yet been addressed. This article is aimed at filling that gap in the literature by designing and analysing the performance of novel skewness strategies in commodity futures markets. Special attention is devoted to testing the robustness of our results and to the strategic role of the newly-designed skewness portfolio as an inflation hedge and as a risk diversifier.

Type: Working paper
Date: le 16/11/2015
Research Cluster : Finance

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