Research On The Arbitrage Between Commodity Future Price And Stock Price

In recent years, China’s commodity futures market has seen a rapiddevelopment, represented by the continued expansion of various products,constantly improvement of the trading mechanism and the furtherintegration of regulation and innovation. Traditional arbitrage method incommodity futures markets includes calendar spread arbitrage,cross-species arbitrage and cross-border arbitrage, however, as the overallreturn on investment decreased and the mechanism improved in China’sfinancial markets and, cross-market arbitrage will undoubtedly be thebiggest opportunity in the future. This thesis focuses on the arbitragebetween commodity futures and stocks of related listed companies. Themain contents are as follows:Firstly, from both theoretical and empirical aspects, the paper studiesthe correlation between commodity future price and related stock price.After an in-depth analysis of influential factor of commodity futures andstock price, we sum up three transmission mechanism of the commodityfuture price and stock price. The first one is the discovery function ofcommodity future. The second is the co-movement effect between thecommodity future price and related stock price, as well as among stocks inthe same industry. The last one is the capital transform effect between thecommodity future market and the stock market. In the empirical part, weselected four representative species: aluminum, gold, coke and sugar as therepresentative of four categories of the commodity future. We conductedtest respectively for each of the three transmission mechanisms by meansof Johansen co-integration test, Granger causality and VAR model.Finally, based on the results of previous studies, the arbitrage model is designed based on the correlation of future price and related stock price.The arbitrage operation is triggered when the ratio of future price and stockprice deviates from a range of the regression trend. Long the relativelyundervalued asset and short the overvalued asset until the ratio comes backto the regression line. Conduct the reverse operation. Empirical test of thearbitrage model shows that investors can take advantage of the correlationof some commodities future price and related stock price and conductcross-market arbitrage, in order to averse the risk of single market andearn a higher return of investment.