22 Feb 2018
This paper presents the most comprehensive study to date on commodity futures in China. We find that passive long-only investments deliver poor economic returns. Among 12 long-short strategies examined, momentum and term structure strategies generate statistically significant economic profits in nearby and distant contracts, illiquid markets and randomly selected commodity sectors. Our results cannot be attributed to aggregate market risks, none-tradable macroeconomic risks, commodity specific risks, market sentiment, transactions costs and data-snooping. We show that liquidity, anchoring bias and regulation induced limits-to-arbitrage provide at least a partial explanation. Furthermore, our findings suggest that long-short strategies that exploit past returns and hedging pressure make excellent candidates for hedging against movements in traditional assets in China. This paper also highlights the urgency to establish a CFTC-type repository for positions data that distinguish hedgers and speculators. Such data are essential to assess the effectiveness of risk transfers in these markets.