{"id":580,"date":"2015-03-19T12:21:25","date_gmt":"2015-03-19T12:21:25","guid":{"rendered":"http:\/\/quantpedia.com\/?p=580"},"modified":"2019-08-22T05:47:42","modified_gmt":"2019-08-22T05:47:42","slug":"new-related-paper-to-100-trading-wtibrent-spread","status":"publish","type":"post","link":"https:\/\/vvv.quantpedia.com\/es\/new-related-paper-to-100-trading-wtibrent-spread\/","title":{"rendered":"New related paper to #100 – Trading WTI\/BRENT Spread"},"content":{"rendered":"

\n\t"The trading rules considered are based on mean-reversion characteristics of price time series. A short term investor would be rather happy to find a time series that exhibits this kind of behavior as it translates to a simple set of trading rules, namely go long (short) whenever the price is considerably below (above) the mean and exit the position when the price is back at the mean. Unfortunately it is hard to find assets that mean-revert in the real world. WTI and Brent are no exception, as the standard Augmented Dickey-Fuller tests for the whole sample period and two sub periods in Table 2 show that the hypothesis that the price series are non-stationary cannot be rejected at the 5% significance level. Therefore, a mean-reverting strategy is not appropriate for trading either WTI or Brent individually. However, an investor is not confined to single price series but can set up a portfolio of assets which may lead to a stationary market value of the portfolio. In other words, if the price series of WTI and Brent are cointegrated, then there exists a linear combination of both series that is stationary. The Johansen-procedure shows that a combination of WTI and Brent is cointegrated."<\/p>","protected":false},"excerpt":{"rendered":"

\n\tRelated research paper has been included into existing free strategy review.<\/p>\n

\n\t#100 – Trading WTI\/BRENT Spread<\/strong><\/a><\/p>\n

\n\tAuthors: Lubnau<\/strong><\/p>\n

\n\tTitle: Spread trading strategies in the crude oil futures market<\/strong><\/p>\n

\n\tLink: http:\/\/econstor.eu\/bitstream\/10419\/96520\/1\/783913591.pdf<\/a><\/p>\n

\n\tAbstract:<\/p>\n

\tThis 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.<\/p>\n

\n\tNotable quotations from the paper:<\/p>\n

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