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Cointegration Based Trading Strategy For Soft Commodities Market

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Author Info

  • Piotr Arendarski

    ()
    (University of Warsaw, Faculty of Economic Sciences)

  • Łukasz Postek

    (University of Warsaw, Faculty of Economic Sciences; National Bank of Poland, Economic Institute)

Abstract

This paper explores cointegration among three of the most popular agriculture soft commodities (corn, soya and wheat) and its potential usefulness for dynamic asset allocation strategies. Johansen tests indicate that natural logarithms of weekly prices of corn, soya and wheat futures are cointegrated and two cointegrating vectors exist. Formal tests show that the estimated long-run relationship is stable even beyond the estimation sample. We use obtained results to create simple trading rules and verify their profitability. The trading strategies’ risk-adjusted abnormal returns look to be significant based on the Sharpe ratio criterion and they are low correlated with the stock market.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP68.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2012-02.

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Length: 13 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:war:wpaper:2012-02

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Related research

Keywords: cointegration; soft commodities; trading rule;

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  1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  2. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774501, October.
  3. G. Geoffrey Booth & Cetin Ciner, 2001. "Linkages among agricultural commodity futures prices: evidence from Tokyo," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(5), pages 311-313.
  4. Ramaprasad Bhar & Shigeyuki Hamori, 2006. "Linkages among agricultural commodity futures prices: some further evidence from Tokyo," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(8), pages 535-539.
  5. Brenner, Robin J. & Kroner, Kenneth F., 1995. "Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 30(01), pages 23-42, March.
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