Skewness / Lottery Effect in Commodities

Guys at AlphaArchitect have been really generous and they have provided a space for us to write a short article.The strategy is built on a research paper written by Fernandez-Perez, Frijns, Fuertes and Miffre — The Skewness of Commodity Futures Returns.

We 1) briefly discuss the lottery effect, 2) we discuss the research on this topic in the context of commodities, and 3) we conduct an independent replication effort of the commodity lottery effect identified in academic research.

Link to article:

https://alphaarchitect.com/…/skewness-effect-in-commodities/

and a short blog post on Quantpedia:

https://quantpedia.com/Blog/Details/skewness-lottery-effect-in-commodities

Shortly:
“ During stressful times, it might be better for practitioners to invest in a portfolio that is negatively correlated with the equity market to gain profit instead of counting loses.

There is strong evidence that investors have a preference for lottery-like assets (the assets that have a relatively small probability of a large payoff or in other words, big skewness). Therefore, it should be profitable to not play the lottery, but rather be “the lottery ticket issuer“ by shorting the commodities with high skewness and going long commodities with low skewness.

Our research suggests that the performance of the equity market represented by the S&P500 index is negatively correlated with the performance of the skewness strategy.

The strategy based on lottery/skewness anomaly can serve as a hedge against equities and offer a profitable possibility to invest during times when equities are in bear markets.”