Article
Pairs trading of Chinese and international commodities
Applied Economics
(2020)
Abstract
We investigate the profitability of a pairs trading strategy using Chinese and international commodity futures contracts covering the period January 2004 to February 2018. We use a time-series approach where the commodity pairs share a similar underlying. An out-of-sample test is employed to infer the performance of these pairs, allowing us to determine the optimal open and close positions for the pairs trading strategy. Applying this strategy to a portfolio of commodities yields an excess return of 2.08% per annum and a Sharpe ratio of 0.79. For a portfolio of metal futures, this strategy yields 5.32% excess returns and a Sharpe ratio of 1.47, whereas for gold-only futures, this strategy yields 7.39% excess returns and 1.95 Sharpe ratio. This performance is superior to traditional strategies based on term structure, momentum, and value portfolios. Arbitrage opportunities in these commodity pairs remain even after accounting for transaction costs and are robust to data-snooping bias.
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Keywords
- Pair trading,
- Chinese commodity futures,
- portfolio gains,
- arbitrage opportunities
Disciplines
Publication Date
2020
DOI
10.1080/00036846.2020.1761009
Citation Information
Adrian Fernandez-Perez, Bart Frijns, Ivan Indriawan and Yiuman Tse. "Pairs trading of Chinese and international commodities" Applied Economics Vol. 52 Iss. 48 (2020) Available at: http://works.bepress.com/yiuman-tse/132/