Overreaction in the Futures-Implied Petroleum Refining Margin?

OFOR Working Paper No 94-07

Posted: 10 Sep 1999

See all articles by Dwight R. Sanders

Dwight R. Sanders

Southern Illinois University - Agribusiness Economics

Date Written: October 1994

Abstract

The futures-implied petroleum cracking spread is examined for overreaction and subsequent mean reversion via a mechanical trading rule: when the implied margin is greater (less) than estimated refining costs a short (long) spread position is entered. The trading rule results in statistically significant profits and displays market timing ability. Monthly trading returns have negative systematic market risk with respect to securities (CAPM), and they are driven primarily by price volatility in the energy sector and unanticipated changes in short-term interest rates (multifactor model). The correlation of returns with proposed risk factors and a concentration of positive profits in the Gulf War period make overreaction conclusions tenuous.

JEL Classification: G13, Q11

Suggested Citation

Sanders, Dwight R., Overreaction in the Futures-Implied Petroleum Refining Margin? (October 1994 ). OFOR Working Paper No 94-07, Available at SSRN: https://ssrn.com/abstract=5890

Dwight R. Sanders (Contact Author)

Southern Illinois University - Agribusiness Economics ( email )

Carbondale, IL 62901-4515
United States
618-453-1711 (Phone)

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