The investor calculates a predictor using informed and consensus forecasts, buying natural gas futures 90 minutes before an announcement if the predictor is negative, and selling if positive, closing positions 5 minutes prior.
ASSET CLASS: futures | REGION: Global | FREQUENCY:
Intraday | MARKET: commodities | KEYWORD: Natural, Gas, Futures, Trading, Traders, Forecasts
I. STRATEGY IN A NUTSHELL
The strategy uses both informed and consensus forecasts to construct a predictor for natural gas futures. When the predictor is negative, the investor takes a long position in futures; when positive, the investor shorts futures. Positions are opened 90 minutes before the announcement and closed 5 minutes prior to it.
II. ECONOMIC RATIONALE
The results indicate that the profitability stems from the accuracy of informed traders’ forecasts, rather than from information leakage. This suggests that informed traders’ superior forecasting ability—rather than unfair access to data—drives the observed market behavior.
III. SOURCE PAPER
What Drives Informed Trading Before Public Releases? Evidence from Natural Gas Inventory Announcements [Click to Open PDF]
Gu, Shanghai Business School – Research Center of Finance; Kurov, West Virginia University – College of Business & Economics
<Abstract>
This paper shows evidence of informed trading in the natural gas futures market before gas inventory announcements. We examine whether traders can predict the upcoming announcement by processing public information. The results show that the difference between the median forecast of analysts with high historical forecasting accuracy and the consensus forecast can be used to predict inventory surprises. This predictor explains some of the pre-announcement price drift, suggesting that informed trading before the announcement is likely to be driven by superior forecasting rather than by information leakage. A simple trading strategy conditioned on the predictor would have generated an annualized Sharpe ratio of 1.26.
IV. BACKTEST PERFORMANCE
| Annualised Return | 8.4% |
| Volatility | 10% |
| Beta | N/A |
| Sharpe Ratio | 0.84 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
