Metals futures market: a comparative analysis of investment and arbitrage strategies
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Received November 27, 2019;Accepted December 16, 2019;Published March 3, 2020
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Author(s)Link to ORCID Index: https://orcid.org/0000-0002-2009-1451Link to ORCID Index: https://orcid.org/0000-0002-0073-8457
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DOIhttp://dx.doi.org/10.21511/dm.17(4).2019.04
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Article InfoVolume 17 2019, Issue #4, pp. 42-54
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Cited by1 articlesJournal title: Resources PolicyArticle title: Beyond the glitter: An empirical assessment of the true risk and hedging role of precious metalsDOI: 10.1016/j.resourpol.2024.105238Volume: 96 / Issue: / First page: 105238 / Year: 2024Contributors: Chitrakalpa Sen, Gagari Chakrabarti
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The article deals with the application of optimal portfolio theory and pair trading theory on the metals futures market. Advantages of the futures market over the spot market include relatively small initial price, low transaction costs, and high volatility. The main aim of the study is to explore the potential of both strategies for effective trading. The following financial instruments were chosen as the inputs of the models: futures on industrial metals (aluminum, copper, nickel, zinc, lead, tin), futures on precious metals (gold and silver). When building the optimal portfolio, it was decided to include Dow Jones Index futures and S&P Index futures among metals. This is because these instruments are extremely volatile and may play the role of a hedge in the portfolio. A drawdown indicator was used to assess the effectiveness of each strategy. The results show that both strategies can be applied on the real-life market. The final choice will depend on the level of risk taking by investors and the desired value of return.
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JEL Classification (Paper profile tab)C22, C58, C61
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References17
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Tables5
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Figures11
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- Figure 1. Average daily notional value, October 2019 (in blns of dollars)
- Figure 2. Daily volume for top six metal futures on CME
- Figure 3. Daily volume for top six metal futures on LME
- Figure 4. Average risk and return
- Figure 5. Efficient frontier
- Figure 6. Total share of gold and INDU Index
- Figure 7. Efficient frontiers for two portfolio sets
- Figure 8. Normalized ratios
- Figure 9. Ratio trading results – lead and copper
- Figure 10. Ratio trading results – tin and silver
- Figure 11. Ratio trading results – tin and gold
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- Table 1. Correlation coefficients
- Table 2. Portfolio members, risk and return
- Table 3. List of pairs
- Table 4. Dickey-Fuller test critical values
- Table 5. Ratios’ statistics
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