In this paper we propose two simple strategies to exploit mean reversion in stationary processes, one maximizing the expected return (risk neutral strategy) and the other maximizing the expected return for a given risk (fixed risk strategy). Only one trade is allowed within a fixed time horizon, so results can be easily compared with those of a buy-and-hold over the same period. Optimal bounds are identified as a function of the reversion speed parameter and the time horizon chosen by the trader. An empirical validation of the two strategies is performed to discuss the potential profitabilty of the mean reverting hypothesis for six commodities chosen from agricultural, metal and energy markets.
Stefani, S., Falbo, P., Felletti, D. (2010). Commodity Trading. In R. Cont (a cura di), Enciclopedia of Quantitative Finance (pp. 308-314). Chichester : John Wiley and Sons.
Commodity Trading
STEFANI, SILVANA;
2010
Abstract
In this paper we propose two simple strategies to exploit mean reversion in stationary processes, one maximizing the expected return (risk neutral strategy) and the other maximizing the expected return for a given risk (fixed risk strategy). Only one trade is allowed within a fixed time horizon, so results can be easily compared with those of a buy-and-hold over the same period. Optimal bounds are identified as a function of the reversion speed parameter and the time horizon chosen by the trader. An empirical validation of the two strategies is performed to discuss the potential profitabilty of the mean reverting hypothesis for six commodities chosen from agricultural, metal and energy markets.
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