Spread trading strategies in the crude oil futures market

Thorben Lubnau

No 353, Discussion Papers from European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics

Abstract: This article explores whether common technical trading strategies used in equity markets can be employed profitably in the markets for WTI and Brent crude oil. The strategies tested are Bollinger Bands, based on a mean-reverting hedge portfolio of WTI and Brent. The trading systems are tested with historical data from 1992 to 2013, representing 22 years of data and for various specifications. The hedge ratio for the crude oil portfolio is derived by using the Johansen procedure and a dynamic linear model with Kalman filtering. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are employed. Results show that some setups of the system are able to be profitable over every five-year period tested. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio. The results indicate that the crude oil market may not be weak-form efficient.

Keywords: Oil Prices; Commodities; Technical trading; Market efficiency; Future returns; Kalman Filtering (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ene and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:euvwdp:353

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