Trading futures spreads: an application of correlation and threshold filters

• Autores: C. Dunis, Jason Laws, Evans Ben
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 16, Nº. 12, 2006, págs. 903-914
• Idioma: inglés
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• Resumen

  • A clear motivation for this paper is the investigation of a correlation filter to improve the return/risk performance of spread trading models. A further motivation for this paper is the extension of trading futures spreads beyond the �Fair Value� type of model used by Butterworth and Holmes (2002). The trading models tested are the following: the cointegration �fair value� approach; reverse moving average (of which the results of the 20-day model are shown here); traditional regression techniques; and Neural Network Regression. Also shown is the effectiveness of two types of filter: a standard filter and a correlation filter on the trading rule returns. Results show that the best model for trading the WTI�Brent spread is the MACD model, which proved to be profitable, both in- and out-of-sample. This is evidenced by out-of-sample annualised returns of 26.35% for the standard filter and 26.15% for the correlation filter (inclusive of transactions costs).