New strategies and asset classes for increased performance

Scheiber, Matthias (2017) New strategies and asset classes for increased performance. Doctoral thesis, Birkbeck, University of London.

Abstract

This thesis explores several topics related to generating yield through new strategies and asset classes. We introduce new investment strategies based on trading Futures contracts in the copper market, thus making important contributions to the literature. We expand the opportunity set of asset strategies by revisiting the concept of transaction time, shed some light on the significance of the forward curve for fundamental as well as technical traders in the commodity market and finally show how low interest rates and capital account restrictions encourage commodity-inventory related asset strategies. After an Introduction chapter, we follow in Chapter 2 upon the transaction time of Geman and Ane (1996) and the temperature of a stock as defined in Derman (2002) and extend them in two ways: the temperature is now a time-varying entity and the analysis is extended to a portfolio of stocks. We use the portfolio temperature in order to assess the cross-section of stock returns creating a long/short factor portfolio within the S&P500 IT Index based on the temperature of the stock and examine its performance on a high frequency database. We show the significance of the risk premium associated with the heat of stocks during turbulent times, focusing on a particular 3-month period in autumn 2015 that was characterized by higher equity market volatility and equity price losses. In Chapter 3, we focus our attention on the fundamental role of inventories in explaining copper price volatility. Copper price volatility has been trading in a range until 2001 but has shown signs of heat afterwards. Using a three-factor model we derive a fundamental long-term value for copper. Second, we emphasis the significance of this fundamental long-term value by considering an agent based model approach in which mean-reversion focused fundamental investors trade with chartists who follow price trends. We show that fundamental investors take increasing positions in copper when the spot price of copper deviated from its fundamental value (i.e. the fundamental value is higher than the spot price) and chartists loose relative significance. In Chapter 4, we expand on the role of inventories in the Theory of Storage and turn our attention to commodity inventory financing in China. In the aftermath of a copper financial scandal in a major Chinese port in 2014 and unprecedented queues in London Metal Exchange - related warehouses in the US acquired by financial institutions, the age-old concept of inventory is becoming elusive. The goal of this chapter is threefold: i) present the motivation and mechanism of the activity of commodity inventory financing in the specific case of copper in China as of 2009; ii) exhibit, through a database of Shanghai bonded warehouse volumes during the years 2008 to 2015, an estimate of the amount of copper involved in inventory financing. iii) Using Shanghai Exchange Futures and spot prices, we also show how interest rate arbitrage via commodity inventory financing has impacted the relationship of the copper forward curve to Shanghai copper inventories. We confirm the validity of the Theory of Storage in the case of the Shanghai copper market and show that adding bonded warehouse data to Shanghai copper inventories weakens the relationship of the forward curve to inventories.

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