Design of Cross-Product Arbitrage Strategy in Forward Market

Abstract

All investors are speculators. They profit from longing an asset and selling it at a higher price or shorting an asset and buying it at a lower price. This is the fundamental concept of arbitrage. Although it sounds simple, arbitrage does not always work. Therefore, researchers have developed systematic and scientific statistical arbitrage approaches for investigation. In this article, we dived into forming pair trading portfolios by using the cointegration analysis method. The objects we investigated are egg, corn, and soybean meal in the future market of China. In the forming stage of the strategy, we proved the existence of a cointegration relationship among the three pairs, namely the egg-corn pair, the egg-soybean meal pair (and the corn-soybean pair. In the back-test study, both the egg-corn pair and egg-soybean meal pair are profitable.