Exploiting the Dynamics of Commodity Futures Curves

Abstract

The Nelson-Siegel framework is employed to model the term structure of commodity futures prices. Exploiting the information embedded in the level, slope and curvature parameters, we develop novel investment strategies that assume short-term continuation of recent parallel, twist or butterfly movements of futures curves. Systematic strategies based on changes in the slope and curvature generate statistically significant profits uncorrelated to previously documented commodity factors. The information content embedded in the curvature parameter appears to be sensitive to market frictions, but the strategy based on the slope parameter remains profitable net of transaction costs and is valuable as an overlay to traditional commodity portfolios.