Pairs trading in Chinese commodity futures markets: an adaptive cointegration approach

Danni Chen, Jing Cui, Yan Gao and Leilei Wu

Accounting and Finance, 2017, vol. 57, issue 5, 1237-1264

Abstract: This study comprehensively examines pairs trading in Chinese commodity futures markets, which, although less researched, represents an important scenario for analysing commodity price behaviour. Based on a sample of daily future returns from 2006 to 2016, we propose a cointegration model that employs an adaptive learning process, and we show that our model yields an average annualised return of 26.94 percent before trading costs, using a closed‐loop strategy. Our results are robust to various tests, including parameter uncertainty, holding period constraints, trading period selection and trading costs.

Date: 2017
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