Technical system trading returns from commodity futures markets

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Weselake, J. Jonathan
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Technical trading systems, also known as system trading or trend following systems, are computerized futures trading methods which use past prices to determine buying and selling signals. System traded monthly returns are computed across 19 commodity futures markets and for a commodity futures portfolio, from 1978-1997. The objective of this study is to analyze the returns from system traded futures markets by testing a cross section of commodities, including agriculturals, metals and financials. This study addresses the level and variability of returns, the possible factors related to returns, the role of commodity returns in investment portfolios and diversification, Capital Asset Pricing Model tests, and portfolio and individual commodity risk-return tradeoffs. Results indicate that currencies show highest returns, while agriculturals show lowest returns. The 19 commodity portfolio produced positive significant monthly returns. Also, the variability of returns is reduced considerably if commodities are traded in a commodity portfolio, rather than individually. Portfolio returns have significant negative autocorrelation, implying that returns alternate between months of positive and negative returns. A GARCH econometric model is used to test for possible factors related to returns. (Abstract shortened by UMI.)