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Modeling, Forecasting and Trading the Crude Oil Term Structure

Last Updated on 10 February, 2024 by Rejaul Karim

In the study “Modeling, Forecasting, and Trading the Crude Oil Term Structure,” Chrilly Donninger from Nimzowerkstatt OEG explores an intriguing logical progression from the work of Barunik and Malinska.

While the former applied the Bond term-structure forecasting model of Diebold and Li to crude oil futures, the focus was primarily on statistical results, neglecting the practical application of the model to trading calendar spreads. Donninger addresses this crucial next step, comparing the performance to strategies based on different rolling strategies.
The paper delves into the intricacies of shorting a less efficient rolling strategy and going long on a more efficient one, both exhibiting similar trading behaviors and comparable performance.

The study’s findings, covering the period from January 2011 to November 2016, offer valuable insights into the dynamics of crude oil futures trading and term-structure forecasting, grounded in the Nelson-Siegel model and roll-yield considerations.

Abstract Of Paper

Barunik and Malinska apply the bond term-structure forecasting model of Diebold and Li to crude oil Futures. But they report only statistical results and do not apply the model to trading calendar spreads. This paper addresses this logical next step. The performance is compared to strategies which are based on different rolling-strategies. Basically one shorts a less efficient rolling-strategy and goes a more efficient long. Both methods boil down to similar trading behavior and have hence also a comparable performance. The performance is in the time range from 2011-01-01 till 2016-11-18 quite reasonable.

Original paper – Download PDF

Here you can download the PDF and original paper of Modeling, Forecasting and Trading the Crude Oil Term Structure.

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Author

Chrilly Donninger
Nimzowerkstatt OEG

Conclusion

Chrilly Donninger’s exploration of the application of the Bond term-structure forecasting model to crude oil futures and its extension to trading calendar spreads provides valuable insights into the dynamics of crude oil markets.

The comparison of performance to strategies based on different rolling strategies unveils the compelling nature of shorting a less efficient rolling strategy and going long on a more efficient one, both exhibiting similar trading behaviors and performance.

With data from January 2011 to November 2016, this study highlights the practical implications of the term-structure forecasting model in crude oil futures trading, underpinned by the Nelson-Siegel model and roll-yield considerations.

These findings thus offer an enriching perspective for market participants and scholars, shedding light on the complexities of forecasting and trading the crude oil term structure.

Related Reading:

Are There Exploitable Trends in Commodity Future Prices?

Commodity Option Implied Volatilities and the Expected Futures Returns

FAQ

What is the main focus of the paper “Modeling, Forecasting, and Trading the Crude Oil Term Structure?”

The main focus of the paper is to explore the application of the Bond term-structure forecasting model of Diebold and Li to crude oil futures. The author, Chrilly Donninger, builds upon the work of Barunik and Malinska, who applied the model to crude oil futures but primarily reported statistical results without delving into the practical application of the model to trading calendar spreads.

What is the logical progression from the work of Barunik and Malinska that the paper addresses?

The logical progression addressed in the paper involves taking the statistical results obtained by Barunik and Malinska in applying the Bond term-structure forecasting model to crude oil futures and extending it to the practical application of trading calendar spreads. This is a crucial next step to understand the real-world implications of the forecasting model in the context of crude oil futures trading.

What is the key comparison made in the paper regarding trading strategies?

The paper compares the performance of the Bond term-structure forecasting model to strategies based on different rolling strategies. Specifically, it explores the strategy of shorting a less efficient rolling strategy and going long on a more efficient one. Despite the different approaches, both methods exhibit similar trading behaviors and demonstrate comparable performance.

You can find many more Research Papers here

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