Trading Time Seasonality in Commodity Futures: An Opportunity for Arbitrage in the Natural Gas and Crude Oil Markets?

32 Pages Posted: 25 Feb 2021

See all articles by Christian-Oliver Ewald

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Erik Haugom

Inland Norway University of Applied Sciences

Gudbrand Lien

Inland School of Business and Social Sciences

Ståle Størdal

Lillehammer University College

Yuexiang Wu

University of Glasgow

Date Written: February 24, 2021

Abstract

For fixed maturity, under the no-arbitrage assumption, futures prices should follow a martingale with respect to the trading time, at least under the pricing measure. Therefore, a prominent display of trading time seasonality under the physical measure raises warning signs and can only occur by means of strong seasonality in the pricing kernel. We show that for natural gas and crude oil, trading time seasonality is present to an extent where it may violate the no-arbitrage assumption. We provide three layers of evidence. The first layer is descriptive only, the second involves the Kruskal--Wicksell test for establishing trading time seasonality, and the third is in the form of a trading strategy, which exploits trading date seasonality. This strategy can produce statistically significant positive alphas in the CAPM context, thereby indicating the possibility of an arbitrage.

Keywords: seasonality, futures, arbitrage, alpha

JEL Classification: G11, G13

Suggested Citation

Ewald, Christian-Oliver and Haugom, Erik and Lien, Gudbrand and Størdal, Ståle and Wu, Yuexiang, Trading Time Seasonality in Commodity Futures: An Opportunity for Arbitrage in the Natural Gas and Crude Oil Markets? (February 24, 2021). Available at SSRN: https://ssrn.com/abstract=3792028 or http://dx.doi.org/10.2139/ssrn.3792028

Christian-Oliver Ewald (Contact Author)

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Erik Haugom

Inland Norway University of Applied Sciences ( email )

HOME PAGE: http://https://www.inn.no/finn-en-ansatt/erik-haugom.html

Gudbrand Lien

Inland School of Business and Social Sciences ( email )

Norway
004792488335 (Phone)

HOME PAGE: http://https://www.inn.no/finn-en-ansatt/gudbrand-lien.html

Ståle Størdal

Lillehammer University College ( email )

Lillehammer, 2624
Norway

Yuexiang Wu

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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