Quantitative Spread Trading on Crude Oil and Refined Products Markets

Quantitative trading in oil-based markets is investigated over 2003--2010, with a focus on WTI, Brent, heating oil and gas oil. A total of 861 spreads are considered. A novel optimal statistical arbitrage trading model is applied, with generalised stepwise procedures controlling for data snooping bias. Aggregating upward and downward mean-reversion, profitable strategies are identified with Sharpe ratios greater than 2 in many instances. For the top categories, average daily returns range from 0.07 to 0.55%, with trade lengths of 9--55 days. A collapse in the number of profitable trading strategies is seen in 2008. Robustness to varying transactions costs is examined.

[1]  N. Kaldor.  Speculation and Economic Stability , 1939 .

[2]  M. Thomas.  Some mean first-passage time approximations for the Ornstein-Uhlenbeck process , 1975, Journal of Applied Probability.

[3]  Shunsuke Sato,et al.  Evaluation of the first-passage time probability to a square root boundary for the Wiener process , 1977, Journal of Applied Probability.

[4]  Oldrich A. Vasicek.  An equilibrium characterization of the term structure , 1977 .

[5]  Shunsuke Sato,et al.  First-passage-time density and moments of the Ornstein-Uhlenbeck process , 1988 .

[6]  W. Crowder,et al.  A cointegration test for oil futures market efficiency , 1993 .

[7]  Andrew C. Szakmary,et al.  Price discovery in petroleum markets: Arbitrage, cointegration, and the time interval of analysis , 1994 .

[8]  A. Shleifer,et al.  The Limits of Arbitrage , 1995 .

[9]  William N. Goetzmann,et al.  Pairs Trading: Performance of a Relative Value Arbitrage Rule , 1998 .

[10]  H. White,et al.  Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap , 1999 .

[11]  Thore Johnsen,et al.  Risk management in the oil industry: can information on long-run equilibrium prices be utilized? , 1999 .

[12]  P. Newbold,et al.  The relative efficiency of commodity futures markets , 1999 .

[13]  Imad A. Moosa,et al.  The relationship between spot and futures prices: Evidence from the crude oil market , 1999 .

[14]  Albert S. Paulson,et al.  Risk arbitrage opportunities in petroleum futures spreads , 1999 .

[15]  H. White,et al.  A Reality Check for Data Snooping , 2000 .

[16]  Friedrich Leisch,et al.  FORECASTING EXCHANGE RATES USING COINTEGRATION MODELS AND INTRA-DAY DATA , 2002 .

[17]  Abdourahmane Sarr,et al.  Measuring Liquidity in Financial Markets , 2002 .

[18]  Manolis G. Kavussanos,et al.  The Expectations Hypothesis of the Term Structure and Risk Premiums in Dry Bulk Shipping Freight Markets , 2002 .

[19]  Robert A. Jarrow,et al.  Testing Market Efficiency Using Statistical Arbitrage with Applications to Momentum and Value Strategies , 2003 .

[20]  Amir H. Alizadeh,et al.  COST OF CARRY, CAUSALITY AND ARBITRAGE BETWEEN OIL FUTURES AND TANKER FREIGHT MARKETS , 2004 .

[21]  G. Vidyamurthy.  Pairs Trading: Quantitative Methods and Analysis , 2004 .

[22]  Mark Whistler,et al.  Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies , 2004 .

[23]  Chung-Ming Kuan,et al.  Re-Examining the Profitability of Technical Analysis with White's Reality Check and Hansen's Spa Test , 2004 .

[24]  Michael Wolf,et al.  Control of generalized error rates in multiple testing , 2007, 0710.2258.

[25]  Min Wu,et al.  Technical Trading-Rule Profitability, Data Snooping, and Reality Check: Evidence from the Foreign Exchange Market , 2005 .

[26]  P. Hansen.  A Test for Superior Predictive Ability , 2005 .

[27]  Mark S. Seasholes,et al.  Understanding the Profitability of Pairs Trading , 2005 .

[28]  R. Faff,et al.  A New Approach to Modeling and Estimation for Pairs Trading , 2006 .

[29]  Yan-Xia Lin,et al.  Loss protection in pairs trading through minimum profit bounds: A cointegration approach , 2006, Adv. Decis. Sci..

[30]  Ben R. Marshall,et al.  Can Commodity Futures be Profitably Traded with Quantitative Market Timing Strategies? , 2007 .

[31]  Cheolbeom Park,et al.  What Do We Know About the Profitability of Technical Analysis? , 2007 .

[32]  Jason Laws,et al.  Trading futures spread portfolios: applications of higher order and recurrent networks , 2008 .

[33]  Michael Wolf,et al.  Balanced Control of Generalized Error Rates , 2008 .

[34]  Svetlozar T. Rachev,et al.  A Profit Model for Spread Trading with an Application to Energy Futures , 2009, The Journal of Trading.

[35]  Greg N. Gregoriou,et al.  Performance and persistence of Commodity Trading Advisors: Further evidence , 2009 .

[36]  Irene Aldridge,et al.  High-frequency Trading High-frequency Trading Industry Strategy Project Engineering Leadership Program , 2022 .

[37]  Analytic Solutions for Optimal Statistical Arbitrage Trading , 2010 .

[38]  Chung-Ming Kuan,et al.  Testing the Predictive Ability of Technical Analysis Using a New Stepwise Test Without Data Snooping Bias , 2009 .

[39]  Yiqun Mou.  Limits to Arbitrage and Commodity Index Investment: Front-Running the Goldman Roll , 2010 .

[40]  Niall O’Sullivan,et al.  High-Frequency Equity Pairs Trading: Transaction Costs, Speed of Execution, and Patterns in Returns , 2010, The Journal of Trading.

[41]  Jason Laws,et al.  Statistical Arbitrage and High-Frequency Data with an Application to Eurostoxx 50 Equities , 2010 .

[42]  M. Avellaneda,et al.  Statistical arbitrage in the US equities market , 2010 .

[43]  Azeem M. Shaikh,et al.  Hypothesis Testing in Econometrics , 2009 .