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Direction-of-change forecasting in commodity futures markets

Research output: Contribution to journalArticlepeer-review

Jiadong Liu, Fotis Papailias, Barry Quinn

Original languageEnglish
Article number101677
JournalInternational Review of Financial Analysis
Volume74
DOIs
PublishedMar 2021

Bibliographical note

Publisher Copyright: © 2021 Elsevier Inc. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.

King's Authors

Abstract

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.

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