Roll strategy efficiency in commodity futures markets

Issues pertaining to the investor decision to sell a security and buy another (of the same type and with the same terms) with a longer period until the expiration date (the roll forward decision) are examined. In particular, a framework is developed in which it is possible to test the trade execution quality efficiency of a roll strategy against a mean–variance optimal roll strategy characterized by multiple-day roll. Applying this framework to five leading US grain futures markets (corn, wheat, soybean, soybean meal and soybean oil) demonstrates that commonly used single-day and multiple-day roll strategies (including the Goldman roll strategy) exhibit considerable inefficiencies. These are consistent over the markets and over the time of the day in which trading occurs, and vary with execution quality risk-aversion in a predictable way. A practical multiple-day roll strategy is proposed that reduces these inefficiencies.