The commodity futures' historical basis in trading strategy and portfolio investment

Abstract

We propose a new trading strategy named the historical basis strategy and analyze its profitability in both the Chinese and the US commodity futures markets. We also compare the profitability of momentum strategy and carry strategy with that of historical basis strategy. The results indicate that the three strategies are profitable in both markets, especially historical basis strategy performs superior to the momentum strategy and inferior to the carry strategy. We also find that the performance of portfolio investment based on the commodity futures' trading strategies is significantly better than based on the commodity futures themselves, and both of them can achieve diversification benefits in stock-bond-currency portfolios. Furthermore, if energy futures are added to trading strategies and portfolios, their profitability rises significantly while the risks increase.