Machine Learning and Algorithmic Pairs Trading in Futures Markets

Baek, Seung‐Ho; Glambosky, Mina; Oh, Seok Hee; Lee, Jeong

doi:10.3390/su12176791

Cited by 8 publications

(1 citation statement)

References 26 publications

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“…More specifically, we have completed an analysis of the development of contango in crisis situations and not only of the effects on prices (as in [31]), which opposes the findings of some other authors (such as [32,33], which continued to see financialization throughout the COVID-19 crisis and other references such as [17] that really focus on the paper of Financialization against Normal Backwardation).…”

Section: Introductionmentioning

confidence: 99%

Fundamentals vs. Financialization during Extreme Events: From Backwardation to Contango, a Copper Market Analysis during the COVID-19 Pandemic

Galán-Gutiérrez

García

2022

Mathematics

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The COVID-19 pandemic has shocked commodities markets in general and base metals markets in particular. The market turmoil made it very difficult to act in the physical market, given the impossibility of establishing or maintaining physical and/or financial positions in a context of high uncertainty. This has happened both in different moments of the development of the pandemic and in geographically different frames. That is why this contribution tries to explain the evolution of warehouses and copper price structure and its utility for hedging in the context of an extreme event. To that end, Granger causality has been used to test whether, during the COVID-19 first wave, the pandemic evolution is cointegrated on one hand with copper futures price structure and, on the other, with the incremental levels of copper stocks. Using 102 official copper prices on London Metal Exchange (LME) trading days, between 13 January 2020 and 5 June 2020 (once the most severe effects of the first wave had been overcome), it was demonstrated that, during the first COVID-19 wave in Europe, the weekly death index variation was cointegrated with the copper future price structure. It has been proven that, in this timelapse, contango in futures price structure has increased its value, and the incremental levels of stock in copper LME warehouses are linked with a stable contango structure. In short, we find that fundamental market effects predominate, in a context in which commodities used to be more financialized. This leads market players, such as traders, miners, and transformers, to move exposures in their hedging structures, under such extreme event situations, in favor of or against either contango or backwardation, so as to derive value from them.

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Section: Introductionmentioning

confidence: 99%