Idiosyncratic Volatility Strategies in Commodity Futures Markets (original) (raw)

This paper studies the relationship between lagged idiosyncratic volatility and subsequent returns in commodity futures markets. The negative pattern observed in international equity markets by Ang et al. (2006, 2009) prevails in commodity futures markets too, suggesting that it may relate to a yet-to-be-specified risk factor that is pervasive across markets. Systematically buying commodities with low idiosyncratic volatility and shorting commodities with high idiosyncratic volatility generates an average alpha of 4.62% a year. Idiosyncratic volatility signals appear more robust to extreme market volatility conditions than momentum and/or term structure signals. Robustness tests show that the profitability of idiosyncratic volatility signals is not an artifact of transaction costs, illiquidity or data mining. They are neither a mere compensation for backwardation and contango nor a manifestation of overreaction.