An Empirical Investigation of Optimal Energy Futures Rolling.

Abstract

When the first Commodity Futures Indexes were constructed not much thought was spent on the rollover strategies. The Futures were in backwardation and one cashed in the roll-yield by simply rolling over from the most nearby Future to the next one. The only consideration was liquidity. Market conditions have changed in recent years. Contango is now the more frequent case. The roll strategy is more sophisticated in the second index generation. This investigation analyzes the performance of several rolling strategies for the 5 most important Energy Futures in the last 10 years. It is shown that one should avoid the crowd if one has to roll nearby Futures. The second generation indexes have - besides for RB - a clear edge. The performance of the different indexes is similar, with the S&P Dynamic Roll Strategy having a slight edge. Optimal rolling is most important for the CL- and NG-Futures. Note: This is a major rework of a previous working paper [1] which considered only WTI and Brent Futures