Inter or Intra? An Analysis of Pairs Trading in Futures Contracts
Abstract
This article shows that the return performance of long-short inter-commodity trades is higher than that of intra-commodity trades in a statistical arbitrage pairs trading strategy. Two futures contracts form an intra-commodity pair if they hold the same underlying commodity but have different expiration dates; they form an inter-commodity pair if the two underlying contracts are for different commodities. The outperformance result holds true in most major futures markets, and also when we consider cross-sector aggregations of these markets. They find the number of mispricing opportunities is the highest in the Energy futures market and mispricing is lowest in the Grains & Softs futures market. Overall, and using the parlance in the oil and gas industry, our results suggest statistical arbitrage mispricing opportunities are more likely found in “crack-spread” trades than in “calendar-spread” trades.
