Limits to Arbitrage and Commodity Index Investment: Front-Running the Goldman Roll
Read the paperopens papers.ssrn.com in a new tab
What they found
Commodity index funds roll their futures positions on a predictable schedule (the GSCI rolls over the fifth to ninth business day of each month). Mou showed that this predictable selling of the expiring contract and buying of the next one moves the spread between them, and that a strategy that front-runs the roll (selling the front and buying the next contract a few days before the index rolls, then reversing) earned large returns from 2000 to 2010, with the effect growing as index assets grew. The paper is a clean example of predictable flow creating a tradable price pressure.
What you can use
- Predictable, price-insensitive flows leave money on the table for whoever trades ahead of them; the Goldman roll is a documented example.
- Calendar-spread behavior around index roll dates is not random; it reflects the mechanics of index funds.
- As more traders front-ran the roll, the profits shrank and index providers changed their methodology, which is the usual life cycle of a flow-based edge.
Caveats
Working paper; the profits were concentrated in the mid-2000s and declined as the effect became known and as index providers diversified roll schedules.
Tags: commodities, futures, index-roll, calendar-spreads
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.