Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures
Michael Mack Frankfurter & Davide Accomazzo
Abstract:
This paper investigates potential sources of return to speculators in the commodity futures market. Initially, we focus on the classic arbitrage model based on the theories of Keynes (1930), Kaldor (1939), Hicks (1939, 1946), Working (1948) and Brennan (1958). Next our study examines the simplified arbitrage model which references the term structure of the futures price curve and provides rationale for a structural risk premium known as the roll return. We then introduce our theory of roll yield permutations which is derived from integrating the futures price curve with the expected future spot price variable. Last, we investigate Spurgin's (2000) hedging response model from which asymmetric hedging response functions transfer risk premia to speculators.
Our research indicates that these models have inherent shortcomings in being able to pinpoint a definitive source of structural risk premium within the complexity of the commodity futures markets. We hypothesize that the classic arbitrage pricing theory contains circular logic, and as a consequence, its natural state is disequilibrium, not equilibrium. We extend this hypothesis to suggest that the term structure of the futures price curve, while indicative of a potential roll return benefit, in fact implies a complex series of roll yield permutations. Similarly, the hedging response function elicits a behavioral risk management mechanisms, and therefore, corroborates social reflexivity. Such models are interrelated and each reflects certain qualities and dynamics within the overall futures market paradigm.
With respect to managed futures, it is an observable materialization of behavioral finance, where risk, return, leverage and skill operate untethered from the anchor of an accurate representation of beta. In other words, it defies rational expectations equilibrium, the efficient market hypothesis and allied models  the CAPM, arbitrage pricing theory or otherwise  to singlehandedly isolate a persistent source of return without that source eventually slipping away.
Frankfurter, Michael Mack and Accomazzo, Davide,Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures(December 31, 2007). Available at SSRN: http://ssrn.com/abstract=1029243
Link: Here
Convergence of AtTheMoney Implied Volatilities to the Spot Volatility
Valdo Durrleman
Abstract:
We study the convergence of atthemoney implied volatilities to the spot volatility in a general model with a Brownian component and a jump component of finite variation. This result is a consequence of the robustness of the BlackScholes formula and of the central limit theorem for martingales.
Link: Here
Option Returns and Volatility Mispricing
Amit Goyal & Alessio Saretto
Abstract:
We study the crosssection of stock options returns and find an economically important source of mispricing in individual equity options. Sorting stocks based on the difference between historical realized volatility and market implied volatility, we find that a zerocost trading strategy that is long (short) in straddles, with a large positive (negative) difference in these two volatility measures, produces an economically important and statistically significant average monthly return. The results are robust to different market conditions, to firm riskcharacteristics, to various industry groupings, to options liquidity characteristics, and are not explained by linear factor models.
Goyal, Amit and Saretto, Alessio,Option Returns and Volatility Mispricing(February 2007). Available at SSRN: http://ssrn.com/abstract=889947
Link: Here
