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The Cross Commodity Arbitraging Design between the Palm Oil Futures Contracts and Soy Oil Futures Contracts

Author: HuangZhiTong
Tutor: ChenYiLi
School: Southwestern University of Finance and Economics
Course: Financial
Keywords: Cointegration Statistical Arbitrage Market-neutral Palm Oil Soy Oil
CLC: F724.5
Type: Master's thesis
Year: 2013
Downloads: 122
Quote: 0
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Abstract


The traditional one-way investment strategies always rely heavily on the investors’ judgments of the trend of the market, which not only require investors to master professional knowledge and skills, but also force them to devote much time and effort to the market information. If there is a kind of market-neutral strategy,which is independent of the market trend, making the investments objective and ensure a steady low-risk yield no matter in a bull market or a bear market, then it would attract a lot of investors.Statistical arbitrage is such kind of a market-neutral strategy. It constructs an arbitrage portfolio which contains both short position and long position, by which most of the market risk is hedged, therefore, statistical arbitrage can be independent of the market trends and gain a steady low-risk yield. In many statistical arbitrage models, the model based on the cointegration method is the most developed one. Hence this paper will illustrate the statistical arbitrage model based on the cointegration method, and apply this model to design an practical arbitrage scheme for the palm oil futures contract and the soy oil futures contracts, aiming to help investors understand details of the steps of statistical arbitrage scheme and know more about the yields this method could earn.The most important feature of this paper is practicability----this paper expounds the following steps in detail:how to select arbitrage portfolio, how to decide the hedge ratio, how to set the trading signals and what action should be taken when the trading signals are triggered. In the last part, this paper applies the statistical arbitrage to an arbitrage example between the palm oil futures contract and the soy oil futures contracts, displaying the detailed process of operating the statistical arbitrage model. As well, this paper analyses the performance of the model in the modeling sample and out of the modeling sample. It is believed that, investors can fully understand and master the basci steps of the statistical arbitrage model based on the cointegration method.

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CLC: > Economic > Trade and Economic > China's domestic trade and economic > Circulation of commodities > Futures Trading
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