The strategy trades WTI futures’ term structure using the Dynamic Nelson-Siegel model, comparing 2nd and 12th futures’ weekly returns, adjusting positions weekly based on return thresholds and forecasts.
ASSET CLASS: ETFs, futures | REGION: United States | FREQUENCY:
Weekly | MARKET: commodities | KEYWORD: Crude Oil, Term Structure
I. STRATEGY IN A NUTSHELL
This strategy applies the Dynamic Nelson-Siegel model to WTI futures, forecasting term structures across maturities with AR-1 and Lasso estimation. Trades are executed weekly by comparing 2nd and 12th futures’ returns, taking long-short calendar spread positions, reversed or extended based on thresholds.
II. ECONOMIC RATIONALE
Crude oil’s volatility stems from geopolitical, economic, and speculative forces. The Dynamic Nelson-Siegel model captures these term structure dynamics, enabling more accurate forecasting and improved trading performance.
III. SOURCE PAPER
Modeling, Forecasting and Trading the Crude Oil Term Structure [Click to Open PDF]
Chrilly Donninger.Nimzowerkstatt OEG
<Abstract>
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.
IV. BACKTEST PERFORMANCE
| Annualised Return | 5.4% |
| Volatility | 7.1% |
| Beta | N/A |
| Sharpe Ratio | 1.05 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
