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Pairs trading with commodity futures: evidence from the Chinese market

Pairs trading with commodity futures: evidence from the Chinese market PurposeThe purpose of this paper is to compare the profitability of different pairs selection and spread trading methods using the complete data set of commodity futures from Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange.Design/methodology/approachParis trading methods that are proposed in the literature are compared in terms of the risk-adjusted returns visa in-sample and out-of-sample backtesting and bootstrapping for robustness.FindingsThe empirical results show that pairs trading in the Chinese commodity futures market offers high returns, whereas, the profitability of these strategies primarily depends on the identification of suitable pairs. The observed high returns are a compensation for the spread divergence risk during the potentially longer holding periods, which implies that the maximum drawdown is more crucial compared to other risk-adjusted return measures such as the Sharpe ratio.Originality/valueComplementary to the existing literature, for the Chinese commodity futures market, it is shown that if shorter maximum holding periods are introduced for the spread positions, then the pairs trading profits decreases. Therefore, the returns do not necessarily imply market inefficiency when the higher maximum drawdown associated with the holding period of the spread position is taken into account. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Pairs trading with commodity futures: evidence from the Chinese market

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
2044-1398
DOI
10.1108/CFRI-09-2016-0109
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to compare the profitability of different pairs selection and spread trading methods using the complete data set of commodity futures from Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange.Design/methodology/approachParis trading methods that are proposed in the literature are compared in terms of the risk-adjusted returns visa in-sample and out-of-sample backtesting and bootstrapping for robustness.FindingsThe empirical results show that pairs trading in the Chinese commodity futures market offers high returns, whereas, the profitability of these strategies primarily depends on the identification of suitable pairs. The observed high returns are a compensation for the spread divergence risk during the potentially longer holding periods, which implies that the maximum drawdown is more crucial compared to other risk-adjusted return measures such as the Sharpe ratio.Originality/valueComplementary to the existing literature, for the Chinese commodity futures market, it is shown that if shorter maximum holding periods are introduced for the spread positions, then the pairs trading profits decreases. Therefore, the returns do not necessarily imply market inefficiency when the higher maximum drawdown associated with the holding period of the spread position is taken into account.

Journal

China Finance Review InternationalEmerald Publishing

Published: Aug 21, 2017

References