Pairs trading of Chinese and international commodities

Adrian Fernandez-Perez, B.P.M. Frijns, Ivan Indriawan, Yiuman Tse*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review


We investigate the profitability of a pairs trading strategy using Chinese and international commodity futures contracts covering the period January 2004 to February 2018. We use a time-series approach where the commodity pairs share a similar underlying. An out-of-sample test is employed to infer the performance of these pairs, allowing us to determine the optimal open and close positions for the pairs trading strategy. Applying this strategy to a portfolio of commodities yields an excess return of 2.08% per annum and a Sharpe ratio of 0.79. For a portfolio of metal futures, this strategy yields 5.32% excess returns and a Sharpe ratio of 1.47, whereas for gold-only futures, this strategy yields 7.39% excess returns and 1.95 Sharpe ratio. This performance is superior to traditional strategies based on term structure, momentum, and value portfolios. Arbitrage opportunities in these commodity pairs remain even after accounting for transaction costs and are robust to data-snooping bias.
Original languageEnglish
Pages (from-to)5203-5217
Number of pages15
JournalApplied Economics
Issue number48
Early online date11 Jun 2020
Publication statusPublished - 13 Oct 2020


  • Pair trading
  • Chinese commodity futures
  • portfolio gains
  • arbitrage opportunities


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