Futures Arbitrage of Different Varieties and based on the Cointegration Which is under the Framework of Bayesian—In the Case of Soy Oil and Palm Oil

Abstract

This paper mainly studies commodity futures arbitrage opportunities across the soy oil and palm oil. The traditional way is traders can carry into the market when the spread out of the reasonable scope. When the price back to normal levels, unwinding operation and complete an arbitrage process. However, spreads of soy oil and palm oil does not meet the stability, so we need to test cointegration model residual error after regression, combined with the maximization of expected return to determine the arbitrage opportunity. In traditional cointegration model, long-term equilibrium relationship is t t y = 3070.8 + 0.50x . When the residual absolute value is greater than 61.125, arbitrageurs may take positions into the market, until the residual back to a reasonable range. However the traditional cointegration model without considering the estimation error, and estimated parameter has high sensitivity. So we will use the bayesian method to estimate parameters, we get the Bayesian- cointegration is t t y = 3071+ 0.54x . The residual under this model is stable. Therefore, we can find arbitrage opportunities through the model. When the residual is more than 142.475 or less than-126.475 triggered buying conditions, and can gain maximum expected return.