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ABSTRACT
In this study, we examine if short term and long term momentum patterns present in commodity futures in Indian commodity futures market. The study employs data of 16 commodities which include agricultural, energy, and metal and the data source is MCX which provides all data for the commodities from November 2005 to October 2016. Besides the above data, the study also uses market returns on National Stock Exchange (NIFTY - 50) and Bombay Stock Exchange BSE - 200) for the same period as the proxies of market. The empirical results show that commodity futures are not found to be an alternative investment class owing to the fact that commodity futures fail to provide the advantage of risk diversification if one uses it as alternative asset class. Capital Asset Pricing Model (CAPM) is unable to describe if one uses the stock market as proxy to market portfolio. It is also found that no prior return patterns are observed in short term as well as long term commodity returns. This study may be useful for investors who are on the pursuit of investing in commodity market to make significant returns.
Introduction
A physical substance, such as an article, food, grains, and metals, which investors buy or sell, usually through futures contracts is called commodity. Commodities have the importance of becoming a separate asset class for investor, arbitrageurs, and speculators. It also provides an efficient portfolio diversification option due to its less volatile nature as compared to equity and debt markets. Though the history of trading of commodity in India goes back to 1875 when Bombay cotton trade association was established, the commodity is traded in a organised way from 2003 when nationwide commodity exchanges such as Multi Commodity Exchange of India ltd. (MCX), National Commodity and Derivatives of India ltd. (NCDEX) were established. From then the commodity trading in India is increasing vibrantly and more number of market participants is being involved to increase their returns by using it as an alternative asset class.
In financial research, many researchers find that trading strategies based on past stock returns yield abnormal returns. Basically there are two types of trading strategies such as- momentum and contrarian strategy. Momentum strategy is based on the hypothesis of price continuation...