Commodity Trading

Mean reversion is a feature largely recognized and tested in several financial series. In particular commodities prices show frequent reversal patterns. In mean reverting markets investors can take advantage of process predictability and can detect optimal strategies in mean-variance terms. Two simple strategies are proposed here to exploit mean reversion in commodity markets, one maximizing the expected return (risk neutral strategy) and the other maximizing the expected return for a given risk (fixed risk strategy). An empirical analysis of 14 commodities price series, selected from agricultural, metal and energy markets, is developed to test the presence of mean reversion and the profitability the two strategies proposed here.