FINANCIAL STATISTICS FINAL ASSESSMENT
The spreadsheet entitled Data for Fin Stats Final provides the weekly return for Crude Oil from Feb 1996 to December 31 2010 in Column B, Commercial Hedging Pressure (CHP) for Crude Oil in Column C and the return on the S&P 500 index in Column D. You need to construct a number of active trading strategies for Crude using lagged CHP, and interpret the performance of these strategies.
1) First compute the correlation between the weekly return on Crude and lagged Crude CHP, that is CHP for the previous week. Do this for the entire sample period and also for each half of the sample period. Are the various correlations significant? What does the sign of the correlation tell you about potential trading strategies
2) We will consider two sorts of trading strategies. The first is the 50% trading strategy that is based on whether CHP in the previous week was greater or less than 0.5. The second is the normalized trading strategy. For this you will need to subtract from CHP in a given week , its 52 week trailing mean (ie based on the previous 52 weeks) and divide by its 52 week trailing standard deviation-this will be called normalized CHP. 3) Based on the sign of the correlation construct both long-short and long-flat 50% and
normalized trading strategies. The long short strategies will go long and otherwise short and the long flat will only go long. The strategies need to go long short or long flat according as CHP is above/below 50% or normalized CHP is above/below zero. When you go long or short will depend on the sign of the correlation. You may try other strategies for extra credit, but these must be well motivated otherwise no credit will be given.
4) Study the performance of these strategies using the various measures analyzed in class. In particular, study alphas relative to the S&P. Use all of these to create a marketing pitch for a client who is interested in the following two issues
i) Should I consider an active strategy in Crude Oil rather than a passive buy and hold strategy
ii) Should I consider an active strategy in Crude Oil over a buy and hold strategy in the S&P 500.
Please submit a report of no more than 1000 words (excluding tables and graphs) and submit it via Dropbox for the Financial Statistics course. Please do not send via e-mail.
