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Mean Reversion Trading on the Naphtha Crack

Author

Listed:
  • Briac Turquet

    (ETH Zurich)

  • Pierre Bajgrowicz

    (Axpo Solutions AG)

  • O. Scaillet

    (Swiss Finance Institute - University of Geneva)

Abstract

We investigate the mean reversion of the naphtha crack after large price moves on daily data over 2014-2024. Our non-parametric estimation of the dynamics of daily changes assuming a univariate diffusion process shows that the reversion strength increases non-linearly after daily moves exceeding a certain threshold. We perform Monte Carlo simulations to study the duration for which the reversion is likely to remain active. We then backtest corresponding trading strategies. We calibrate parameters of the strategy using grid search while controlling for multiple testing. On average the tested strategies deliver positive returns after transaction costs. We are able to select a subset of outperforming strategies generating robust positive net returns. The existence of positive returns can be explained by differences in liquidity, execution speed, and categories of participants in the naphtha and Brent markets constituting the two legs of the naphtha crack.

Suggested Citation

  • Briac Turquet & Pierre Bajgrowicz & O. Scaillet, 2024. "Mean Reversion Trading on the Naphtha Crack," Swiss Finance Institute Research Paper Series 24-101, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp24101
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    More about this item

    Keywords

    oil derivatives; naptha crack; statistical arbitrage; mean reversion;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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