Synthetic Floating Crude Oil Storage and Optimal Statistical Arbitrage: A Model Specification Analysis
36 Pages Posted: 24 Sep 2011
Date Written: May 22, 2011
Abstract
The informational flow between oil and spot freight markets is examined in a novel way via the time charter equivalent (TCE) to identify statistical arbitrage trading opportunities. Using Brent and TD3 data, synthetic floating storage positions are constructed, which are shown to be cointegrated with Brent futures prices of common maturity. A comprehensive model specification analysis of the optimal statistical arbitrage trading model of Bertram (2010) is performed on this data. Model misspecification in the underlying Gaussian Ornstein-Uhlenbeck (OU) process is identified. Evidence of threshold effects and the possibility of structural change in the cointegration relationships is presented.
Keywords: synthetic floating storage, time charter equivalent, optimal statistical arbitrage, threshold cointegration, structural change cointegration
JEL Classification: C01, C52, C58
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