A stochastic model for commodity pairs trading

Goencue A., Akyildirim E.

QUANTITATIVE FINANCE, cilt.16, sa.12, ss.1843-1857, 2016 (SCI-Expanded) identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 16 Sayı: 12
  • Basım Tarihi: 2016
  • Doi Numarası: 10.1080/14697688.2016.1211793
  • Dergi Adı: QUANTITATIVE FINANCE
  • Derginin Tarandığı İndeksler: Science Citation Index Expanded (SCI-EXPANDED), Social Sciences Citation Index (SSCI), Scopus
  • Sayfa Sayıları: ss.1843-1857
  • Anahtar Kelimeler: Commodity futures, Statistical arbitrage, Pairs trading, Optimal thresholds, Ornstein-Uhlenbeck Levy process, STATISTICAL ARBITRAGE, RETURNS, MARKET
  • Akdeniz Üniversitesi Adresli: Evet

Özet

In this study, we introduce an optimal pairs trading model and verify its performance in the commodity futures markets. Empirical evidence from commodity futures indicates the existence of significant mean reversion together with high peak and fat tails for the distribution of spread residuals. Therefore, we assume an Ornstein-Uhlenbeck process with the noise term driven by a Levy process with generalized hyperbolic distributed marginals. Our model not only provides trading signals, but also can be considered as a pair screening technique to rank all potential pairs for trade priority in terms of the distance to the expected profit-maximizing thresholds. Empirical examples and backtesting results obtained from commodity futures data show strong support for the profitability of the model even in the presence of transaction costs.