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Soybean Futures Crush Spread Arbitrage: Trading Strategies and Market Efficiency

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  • John B. Mitchell

    ()
    (Department of Finance and Law, 328 Sloan Hall, Central Michigan University, Mt. Pleasant, Michigan, 48859, USA)

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    Abstract

    This paper revisits the soybean crush spread arbitrage work of Simon (1999) by studying a longer time period, wider variety of entry and exit limits, and the risk-return relationship between entry and exit limits. The lengths of winning and losing trades are found to differ systematically, with winning trades significantly shorter on average than losing trades. Exiting trades near the 5- day moving average is shown to improve trade performance relative to a reversal of sign and magnitude from the entry spread. These results lead to trading rules designed to prevent lengthy trades; however, the profitability of trading rules is found to be unstable.

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    Bibliographic Info

    Article provided by MDPI, Open Access Journal in its journal Journal of Risk and Financial Management.

    Volume (Year): 3 (2010)
    Issue (Month): 1 (December)
    Pages: 63-96

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    Handle: RePEc:gam:jjrfmx:v:3:y:2010:i:1:p:63-96:d:28369

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    Related research

    Keywords: Futures; spread; arbitrage; market efficiency; trading strategies;

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    1. Michael S. Haigh & Matthew T. Holt, 2002. "Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(3), pages 269-289.
    2. Poitras, Geoffrey, 1998. "TED Tandems: Arbitrage Restrictions and the US Treasury Bill/Eurodollar Futures Spread," International Review of Economics & Finance, Elsevier, Elsevier, vol. 7(3), pages 255-276.
    3. Barry Goodwin & Randy Schnepf & Erik Dohlman, 2005. "Modelling soybean prices in a changing policy environment," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(3), pages 253-263.
    4. Elfakhani, Said & Wionzek, Ritchie J., 1997. "Intermarket spread opportunities between Canadian and American agricultural futures," International Review of Economics & Finance, Elsevier, Elsevier, vol. 6(4), pages 361-377.
    5. C. L. Dunis & Jason Laws & Ben Evans, 2006. "Trading futures spreads: an application of correlation and threshold filters," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(12), pages 903-914.
    6. Darren Butterworth & Phil Holmes, 2002. "Inter-market spread trading: evidence from UK index futures markets," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(11), pages 783-790.
    7. Cuny, Charles J., 2006. "Why derivatives on derivatives? The case of spread futures," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 15(1), pages 132-159, January.
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