Mean Reversion Trading on the Naphtha Crack

Briac Turquet, Pierre Bajgrowicz and Olivier Scaillet
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Briac Turquet: ETH Zurich
Pierre Bajgrowicz: Axpo Solutions AG

No 24-101, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate the mean reversion of the naphtha crack after large price moves on daily data over 2014-2024. Our non-parametric estimation of the dynamics of daily changes assuming a univariate diffusion process shows that the reversion strength increases non-linearly after daily moves exceeding a certain threshold. We perform Monte Carlo simulations to study the duration for which the reversion is likely to remain active. We then backtest corresponding trading strategies. We calibrate parameters of the strategy using grid search while controlling for multiple testing. On average the tested strategies deliver positive returns after transaction costs. We are able to select a subset of outperforming strategies generating robust positive net returns. The existence of positive returns can be explained by differences in liquidity, execution speed, and categories of participants in the naphtha and Brent markets constituting the two legs of the naphtha crack.

Keywords: oil derivatives; naptha crack; statistical arbitrage; mean reversion (search for similar items in EconPapers)
JEL-codes: G13 G14 G15 G17 G18 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-11
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp24101

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