A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures

In the present paper we tested the use of Markov-switching Generalized AutoRegressive Conditional Heteroscedasticity (MS-GARCH) models and their not generalized (MS-ARCH) version. This, for active trading decisions in the coffee, cocoa, and sugar future markets. With weekly data from 7 January 2000...

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Bibliographic Details
Published inMathematics (Basel) Vol. 8; no. 6; p. 1001
Main Authors De la Torre-Torres, Oscar V., Aguilasocho-Montoya, Dora, del Río-Rama, María de la Cruz
Format Journal Article
LanguageEnglish
Published Basel MDPI AG 01.06.2020
Subjects
Agricultural commodities
Algorithms
Autoregressive models
Cocoa
Coffee
Commodity futures
commodity futures’ trading
computational finance
Computer simulation
financial market distress prediction
Food science
Hedging
Investment policy
Investments
Markov chain Monte Carlo
Markov-switching GARCH
Probability
Recessions
Securities markets
soft commodities
Standard deviation
Stochastic models
Stock exchanges
Switching
Time series
United Kingdom > UK
United States > US
Online AccessGet full text
ISSN2227-7390
2227-7390
DOI10.3390/math8061001

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Summary:In the present paper we tested the use of Markov-switching Generalized AutoRegressive Conditional Heteroscedasticity (MS-GARCH) models and their not generalized (MS-ARCH) version. This, for active trading decisions in the coffee, cocoa, and sugar future markets. With weekly data from 7 January 2000 to 3 April 2020, we simulated the performance that a futures’ trader would have had, had she used the next trading algorithm: To invest in the security if the probability of being in a distress regime is less or equal to 50% or to invest in the U.S. three-month Treasury bill otherwise. Our results suggest that the use of t-student Markov Switching Component ARCH Model (MS-ARCH) models is appropriate for active trading in the cocoa futures and the Gaussian MS-GARCH is appropriate for sugar. For the specific case of the coffee market, we did not find evidence in favor of the use of MS-GARCH models. This is so by the fact that the trading algorithm led to inaccurate trading signs. Our results are of potential use for futures’ position traders or portfolio managers who want a quantitative trading algorithm for active trading in these commodity futures.
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ISSN:2227-7390
2227-7390
DOI:10.3390/math8061001