Modeling iron ore spot and futures market

Abstract

We document significant momentum returns in iron ore spot market. We find that the returns of the preceding three days have an explanatory power for the return of the following day, consistent with behavioural theories. However, we find that in iron ore futures market momentum returns are not persistent over time, and from preceding days’ returns only the last day’s return may have explanatory power to predict future returns. Nevertheless, back-tested trading algorithm has shown that, although in frictionless market there would be an opportunity to profitably trade on momentum, having realistic transaction costs eliminates these excess profits.