Volatility-managed commodity futures portfolios

Abstract

This paper examines whether the volatility management suggested by Moreira and Muir to improve profitability in the equity market can generate significant benefits both in-sample and out-of-sample in commodity futures markets as well. The in-sample results show the significant success of volatility management from the 12-month momentum and market portfolio, but the out-of-sample results show that volatility management fails to improve real-time performance, which indicates that in-sample results are not obtainable for real-time investors in the commodity futures markets. To understand the failure of volatility management, we perform the simulation analysis and find that a negative risk-return relation seems to play a pivotal role in addition to strong volatility persistency to make volatility management successful.