Commodity Futures Skewness: Long Low-Skewness, Short High-Skewness
Summary
The document describes a monthly cross-sectional strategy across 22 commodity futures. It calculates each contract’s skewness over the prior 12 months, buys three commodities with the lowest skewness, and shorts three with the highest, using equal weights and monthly rebalancing. The proposed explanation is that investor demand for lottery-like positive skew can depress future returns, while negative skew may be underpriced because it carries crash risk. Hedging pressure may contribute to these distortions.
The cited research and page summary report robust results across strategy variants, specifications, and time periods, and say that adding momentum does not improve performance. Related cited work reports positive excess returns and negative equity-market correlation, suggesting possible diversification during equity declines. These claims are summaries of specific studies, not guarantees. The document provides limited detail on data construction, trading costs, and implementation constraints, so results may depend on sample and execution assumptions.
Key ideas
- Rank commodity futures monthly by trailing 12-month return skewness.
- Buy three of the lowest-skewness contracts and short three of the highest-skewness contracts with equal weights.
- The proposed mechanism links lottery demand to overpricing of positive-skew assets and crash-risk premia to negative-skew assets.
- The page reports robustness across specifications and periods, while momentum adds no improvement.
- Reported negative equity correlation may support diversification, but it does not establish reliable crisis protection.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.