Harvesting Commodity Curve Premiums Through Roll-Yield Differentials

Abstract

Commodity futures long–short strategies based on term-structure signals have been shown to produce consistent long-term abnormal returns. However, these strategies are quite risky and prone to substantial drawdowns from time to time as a result of their directional nature. Gomes shows that by targeting roll-yield differentials between highly correlated commodities, it is possible to partially neutralize spot price movements and attain a market-neutral strategy that generates consistent alpha.

TOPICS: Commodities, futures and forward contracts, performance measurement