Momentum in Asset Returns

Abstract

This article reviews research on momentum in asset markets, with an emphasis on research involving momentum in commodity markets. Commodity markets are different than the markets for financial assets, such as stocks and bonds. Storage costs, inventory levels, and hedging demand by suppliers and producers influence commodity prices in ways that may not be observed in other asset classes. Research indicates that momentum profits are related to these market structure factors. The persistence of momentum in commodity markets has implications for investment products that incorporate commodities. The popularity of commodity investments among institutional investors has increased dramatically in the past decade. While some investors have allocated funds to hedge funds that incorporate momentum-based strategies, most of these investments are in indices that do not have a momentum component to the return. Research indicates that adding a momentum component to a commodity portfolio may provide strategic benefits in the form of higher risk-adjusted returns and reduced volatility.

TOPICS: Commodities, analysis of individual factors/risk premia, performance measurement