Crude oil spread trading strategies
As both oils are very similar their spread shows signs of strong predictability and usually oscillates around some average value. It is therefore possible to use deviations crude oil spread trading strategies the fair spread value to bet on convergence back to fair value. The fair spread value could be calculated via moving average, regression, neural network regression or other procedures. We present moving average calculation as an example trading strategy from the source paper. Both oils differ in chemical compositions and they differ also in production and transportation attributes.
These differences are reflected in the price spread between both futures contracts. The spread is mean reverting because most of the price shocks are only temporal so the crude oil spread trading strategies moves back to its long term economical equilibrium and therefore it is possible to create a trading strategy based on this mean reversion.
Caution should be only needed in utilizing parameters from the source paper as they are based on the short history and therefore could be susceptible to data mining bias.
If the current spread value is above SMA 20 then we enter a short position in the spread on close betting that the spread will decrease to fair value represented by SMA The trade is closed at the close of the trading day when the spread crosses crude oil spread trading strategies fair value. If the current spread value is below SMA 20 then we enter a long position betting that the spread will increase and the trade is closed at the close of the trading day when the spread crosses above fair value.
An Application of Correlation http: Also shown is the effectiveness of the two types of filter, a standard filter and a correlation filter on the trading rule returns.
This is shown by out-of-sample annualised returns of Spread trading strategies in the crude oil futures market http: The trading systems are tested with historical data from torepresenting 22 years of data and for various specifications. The hedge ratio for the crude oil portfolio is derived by using the Johansen procedure and a dynamic linear model with Kalman filtering. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are employed.
Results show that some setups of the system are able to be profitable over every five-year period tested. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio.
The results indicate that the crude oil market may not be weak-form efficient. The Poverty of Academic Finance Research: One can always try an additional factor and will find a significant Cross-Sectional result with enough trial crude oil spread trading strategies error. Lopez de Prado argues in a series of articles in a similar vein. Theoretically scientific results are falsifiable. Practically previous results and publications are checked only in rare occasions. Growth in a Time crude oil spread trading strategies Depth by Reinhart-Rogoff was the most influential economic paper in recent years.
It was published in a top journal. Although the paper contained even trivial Excel-Bugs it took 3 years till the wrong results and the poor methodology crude oil spread trading strategies fully revealed. The reviewers did not check the simple spreadsheets. This paper analyzes a less prominent example about spread trading in the crude oil futures market by Thorben Lubnau. The author reports for his very simple strategy a long term Sharpe-Ratios above 3.
It crude oil spread trading strategies shown that - like for Reinhart-Rogoff - one needs no sophisticated test statistics to falsify the results. The explanation is much simpler: The author has no clue of trading. He used the wrong data. Log in Sign up. Notes to Confidence in anomaly's validity.
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