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Soybean Futures Crush Spread Arbitrage: Trading Strategies and Market Efficiency

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  • John B. Mitchell

    (Department of Finance and Law, 328 Sloan Hall, Central Michigan University, Mt. Pleasant, Michigan, 48859, USA)

Abstract

This paper revisits the soybean crush spread arbitrage work of Simon (1999) by studying a longer time period, wider variety of entry and exit limits, and the risk-return relationship between entry and exit limits. The lengths of winning and losing trades are found to differ systematically, with winning trades significantly shorter on average than losing trades. Exiting trades near the 5- day moving average is shown to improve trade performance relative to a reversal of sign and magnitude from the entry spread. These results lead to trading rules designed to prevent lengthy trades; however, the profitability of trading rules is found to be unstable.

Suggested Citation

  • John B. Mitchell, 2010. "Soybean Futures Crush Spread Arbitrage: Trading Strategies and Market Efficiency," JRFM, MDPI, vol. 3(1), pages 1-34, December.
    • Handle: RePEc:gam:jjrfmx:v:3:y:2010:i:1:p:63-96:d:28369
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    References listed on IDEAS

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    1. Darren Butterworth & Phil Holmes, 2002. "Inter-market spread trading: evidence from UK index futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 12(11), pages 783-790.
    2. Poitras, Geoffrey, 1998. "TED Tandems: Arbitrage Restrictions and the US Treasury Bill/Eurodollar Futures Spread," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 255-276.
    3. Barry Goodwin & Randy Schnepf & Erik Dohlman, 2005. "Modelling soybean prices in a changing policy environment," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 253-263.
    4. Elfakhani, Said & Wionzek, Ritchie J., 1997. "Intermarket spread opportunities between Canadian and American agricultural futures," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 361-377.
    5. Paul Berhanu Girma & Albert S. Paulson, 1999. "Risk arbitrage opportunities in petroleum futures spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(8), pages 931-955, December.
    6. Cuny, Charles J., 2006. "Why derivatives on derivatives? The case of spread futures," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 132-159, January.
    7. C. L. Dunis & Jason Laws & Ben Evans, 2006. "Trading futures spreads: an application of correlation and threshold filters," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 903-914.
    8. Michael S. Haigh & Matthew T. Holt, 2002. "Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 269-289.
    9. W. Brian Barrett & Robert W. Kolb, 1995. "Analysis of spreads in agricultural futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(1), pages 69-86, February.
    10. Dominic Rechner & Geoffrey Poitras, 1993. "Putting on the crush: Day trading the soybean complex spread," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(1), pages 61-75, February.
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    Cited by:

    1. Johannes Stübinger & Lucas Schneider, 2019. "Statistical Arbitrage with Mean-Reverting Overnight Price Gaps on High-Frequency Data of the S&P 500," JRFM, MDPI, vol. 12(2), pages 1-19, April.
    2. Liu, Jianhe & Lu, Luze & Zong, Xiangyu & Xie, Baao, 2023. "Nonlinear relationships in soybean commodities Pairs trading-test by deep reinforcement learning," Finance Research Letters, Elsevier, vol. 58(PC).
    3. Fousekis, Panos & Tzaferi, Dimitra, 2022. "Price multifractality and informational efficiency in the futures markets of the US soybean complex," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 66, pages 68-84.
    4. Yang, Yao & Karali, Berna, 2022. "How far is too far for volatility transmission?," Journal of Commodity Markets, Elsevier, vol. 26(C).
    5. Ruan, Qingsong & Cui, Hao & Fan, Liming, 2020. "China’s soybean crush spread: Nonlinear analysis based on MF-DCCA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 554(C).
    6. Zhou, Xinquan & Bagnarosa, Guillaume & Gohin, Alexandre & Pennings, Joost M.E. & Debie, Philippe, 2023. "Microstructure and high-frequency price discovery in the soybean complex," Journal of Commodity Markets, Elsevier, vol. 30(C).

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