Pair Trading Strategy In Commodity Market

China hedge fund started with huge developments since year 2010 when stock index futures and margin trading function became available. Quantitative trading strategy is the key to profitable hedge fund, therefore, domestic hedge funds started to develop independent trading strategies. At the meantime, they also tried to apply the sophisticated trading strategies in foreign markets into the Chinese market. Pair trading strategy is one of the many well-known strategies.Currently, the study of pair trading strategy focused on the stock market, the thesis will extend the research to the futures market. There are three reasons: First, the cost of shorting in the stock market is much higher than in the futures market; the second reason is that the kinds of pairs in stock market are limited, while in futures market, there are cross-calendar, cross-species and cross-market pair; the third reason is that the futures market can be leveraged to increase the profitability.This thesis built a model for back test. Taking into account the liquidity and trading hours, eventually the gold and silver are chosen for further research. After getting the back test results, the thesis continued to conduct the sensitivity tests for the parameters, detect the profit source on the largest earnings day, and investigate the effects of delayed transaction. Finally, the out of sample test was conducted. Results and subsequent analysis suggested that the pair trading strategy could be used in Chinese futures market to achieve good returns.