TY - JOUR
T1 - Direction-of-change forecasting in commodity futures markets
AU - Liu, Jiadong
AU - Papailias, Fotis
AU - Quinn, Barry
N1 - Publisher Copyright:
© 2021 Elsevier Inc.
Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.
PY - 2021/3
Y1 - 2021/3
N2 - This paper examines direction-of-change predictability in commodity futures markets using a variety of binary probabilistic techniques. As well as traditional techniques, we apply Variable Length Markov Chain (VLMC) analysis, an innovative technique popularised in computational biology when predicting DNA sequences (Bühlmann & Wyner, 1999). To the best of our knowledge, this is the first application of VLMC in finance. Our results show that both VLMC and technical analysis methods provide strong predictability of the direction-of-change of commodity returns, with annualised mean returns of approximately 8%, substantially higher than the passive long strategy. Our results suggest that a short-term learning effect is present in commodities market which can be exploited using innovative direction-of-change forecasting techniques.
AB - This paper examines direction-of-change predictability in commodity futures markets using a variety of binary probabilistic techniques. As well as traditional techniques, we apply Variable Length Markov Chain (VLMC) analysis, an innovative technique popularised in computational biology when predicting DNA sequences (Bühlmann & Wyner, 1999). To the best of our knowledge, this is the first application of VLMC in finance. Our results show that both VLMC and technical analysis methods provide strong predictability of the direction-of-change of commodity returns, with annualised mean returns of approximately 8%, substantially higher than the passive long strategy. Our results suggest that a short-term learning effect is present in commodities market which can be exploited using innovative direction-of-change forecasting techniques.
KW - Direction-of-change
KW - Dynamic probit model
KW - Forecasting commodity futures
KW - Return signal momentum
KW - Variable length Markov chain
UR - http://www.scopus.com/inward/record.url?scp=85101172541&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2021.101677
DO - 10.1016/j.irfa.2021.101677
M3 - Article
AN - SCOPUS:85101172541
SN - 1057-5219
VL - 74
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
M1 - 101677
ER -