New related paper to #100 – Trading WTI/BRENT Spread

"The trading rules considered are based on mean-reversion characteristics of price time series. A short term investor would be rather happy to find a time series that exhibits this kind of behavior as it translates to a simple set of trading rules, namely go long (short) whenever the price is considerably below (above) the mean and exit the position when the price is back at the mean. Unfortunately it is hard to find assets that mean-revert in the real world. WTI and Brent are no exception, as the standard Augmented Dickey-Fuller tests for the whole sample period and two sub periods in Table 2 show that the hypothesis that the price series are non-stationary cannot be rejected at the 5% significance level. Therefore, a mean-reverting strategy is not appropriate for trading either WTI or Brent individually. However, an investor is not confined to single price series but can set up a portfolio of assets which may lead to a stationary market value of the portfolio. In other words, if the price series of WTI and Brent are cointegrated, then there exists a linear combination of both series that is stationary. The Johansen-procedure shows that a combination of WTI and Brent is cointegrated."

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