A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures
Abstract
:1. Introduction
2. Literature Review of the Use of MS-GARCH Models
- To invest in the simulated commodity future if the investor expects to be in the low-volatility () regime at or
- To invest in the U.S. risk-free asset if the investor expects to be in the high-volatility () regime.
3. Methods and Materials
3.1. The Rationale behind MS and MS-GARCH Models, the Input Data Processing Method, and the Trading Strategy Simulation’s Parameters
- (1)
- To estimate the parameter set of a MS or MS-GARCH (with Gaussian or t-student pdf).
- (2)
- To forecast the smoothed probability () of being in the distress regime at with Equation (15).
- (3)
- To follow the next trading algorithm:
- If ,
- To invest in a risk-free asset (such as the three-month Treasury bill).
- Else
- To invest in the managed commodity as risky asset.
3.2. Data Processing
Algorithm 1. The MS-GARCH based trading algorithm’s pseudocode. |
For date 1 to 1057:
End |
4. Results and Discussion
5. Concluding Remarks
Author Contributions
Funding
Conflicts of Interest
References
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Refinitiv RIC | Security Name | Ticker Used | Exchange |
---|---|---|---|
CCc1 | ICE-US Cocoa 1-month continuation future | Cocoa | CME-NYMEX |
SBc1 | ICE-US Sugar No.11 1-month continuation future | Sugar | CME-NYMEX |
UST3MT=RR | U.S. 3-month Treasury bill | USTBILL | OTC |
MS Model | Coffee | Cocoa | Sugar | |
---|---|---|---|---|
Single-Gaussian | −2699.3597 | −3214.9534 | −3109.5732 | |
Single-tStud | −2919.3981 | −3329.3646 | −3216.1418 | |
MS-Gaussian | −2963.2332 | −3332.1498 | −3218.7971 | |
MS-tStud | −2974.622[Best] | −3350.0588 | −3258.1922 | |
MSARCH-Gaussian | −2953.759 | −3325.6856 | −3216.1543 | |
MSARCH-tStud | −2967.7068 | −3341.8939 | −3255.5772 | |
MSGARCH-Gaussian | −2967.1237 | −3366.9723 | −3238.0013 | |
MSGARCH-tStud | −2974.2583 | −3372.5889[Best] | −3259.7268[Best] |
Portfolio | Accumulated Return | Mean Return | Return Std. Dev. | Lowest Weekly Return | Sharpe Ratio |
---|---|---|---|---|---|
Coffee | 164.7353 | 0.0922 | 4.2668 | −16.2170 | 0.0215 |
Cocoa | 594.5557 | 0.1835 | 4.301 | −23.0542 | 0.0426 |
Sugar | 365.5376 | 0.1456 | 4.5201 | −17.3969 | 0.0322 |
USTBILL | 41.457 | 0.0498 | 0.0414 | - | - |
Portfolio | Accumulated Return | Mean Return | Return Std. Dev. | Lowest Weekly Return | Sharpe Ratio |
---|---|---|---|---|---|
Cocoa-MS-Gaussian | 431.843 | 0.1583 | 3.9399 | −14.1671 | 0.0325 |
Cocoa-MS-t Student | 512.7569 | 0.1717 | 2.4549 | −9.5813 | 0.0307 |
Cocoa-MSARCH-Gaussian | 504.4178 | 0.1704 | 4.062 | −23.0489 | 0.0377 |
Cocoa-MSARCH-t Student | 801.2475 | 0.2082 | 2.8363 | −23.0475 | 0.0386 |
Cocoa-MSGARCH-Gaussian | 594.5557 | 0.1835 | 4.301 | −23.0542 | 0.038 |
Cocoa-MSGARCH-t Student | 389.2472 | 0.1504 | 3.9084 | −23.0339 | 0.0297 |
Portfolio | Accumulated Return | Mean Return | Return Std. Dev. | Lowest Weekly Return | Sharpe Ratio |
---|---|---|---|---|---|
Sugar-MS-Gaussian | 146.2971 | 0.0854 | 2.7338 | −12.6382 | 0.014 |
Sugar-MS-tStud | 56.4792 | 0.0424 | 0.844 | −4.7119 | 0.0022 |
Sugar-MSARCH-Gaussian | 306.4918 | 0.1328 | 2.7631 | −11.4508 | 0.0288 |
Sugar-MSARCH-tStud | 27.1906 | 0.0228 | 0.9576 | −6.6802 | −0.0059 |
Sugar-MSGARCH-Gaussian | 710.7164 | 0.1982 | 4.1223 | −17.3937 | 0.0348 |
Sugar-MSGARCH-tStud | 167.8353 | 0.0933 | 2.1446 | −17.3852 | 0.0108 |
Portfolio | Accumulated Return | Mean Return | Return Std. Dev. | Lowest Weekly Return | Sharpe Ratio |
---|---|---|---|---|---|
Coffee-MS-Gaussian | 11.3484 | 0.0102 | 4.0688 | −11.8899 | −0.0062 |
Coffee-MS-tStud | 72.9009 | 0.0519 | 4.0685 | −11.8863 | −0.0003 |
Coffee-MSARCH-Gaussian | 11.6724 | 0.0105 | 4.07 | −11.8899 | −0.0062 |
Coffee-MSARCH-tStud | 4.2611 | 0.004 | 4.0444 | −11.8857 | −0.012 |
Coffee-MSGARCH-Gaussian | 90.5161 | 0.061 | 4.1543 | −11.8899 | 0.0022 |
Coffee-MSGARCH-tStud | −5.366 | −0.0052 | 3.8614 | −16.2139 | −0.0102 |
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De la Torre-Torres, O.V.; Aguilasocho-Montoya, D.; del Río-Rama, M.d.l.C. A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures. Mathematics 2020, 8, 1001. https://doi.org/10.3390/math8061001
De la Torre-Torres OV, Aguilasocho-Montoya D, del Río-Rama MdlC. A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures. Mathematics. 2020; 8(6):1001. https://doi.org/10.3390/math8061001
Chicago/Turabian StyleDe la Torre-Torres, Oscar V., Dora Aguilasocho-Montoya, and María de la Cruz del Río-Rama. 2020. "A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures" Mathematics 8, no. 6: 1001. https://doi.org/10.3390/math8061001
APA StyleDe la Torre-Torres, O. V., Aguilasocho-Montoya, D., & del Río-Rama, M. d. l. C. (2020). A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures. Mathematics, 8(6), 1001. https://doi.org/10.3390/math8061001