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In this study, we applied a stochastic spread pairs trading strategy on theIndian commodity market. The complete set of commodities were taken whose spotprice was available for the period of January 1st 2010 to December 31st 2018including energy, metals and the agricultural commodity sector. Spot data wastaken from the MCX pooled spot prices for 17 commodities. The data was splitinto training period (January 1st 2010 to 14th March 2017) and testingperiod(15th Match 2017 to 31st December 2018). The splitting was done using a80:20 split.Johanssen Cointegration tests were done on training data for pairsof commodities to check for long-run relationship and the cointegratedcommodities were selected for formation of the trading process. We found atotal of 12 cointegrated pairs out of 136 possible pairs. Cointegration wasassumed for the testing period. A single-factor stochastic trading approach wasapplied on the logarithmic spread of the cointegrated pairs for both thetraining and testing period.The parameters of stochastic spread model wereestimated using differential evolution algorithm. Also parameters for thetrading rule were optimized by backtesting on the training period and assumedfor the testing period. The results show a sharpe ratio of above 1.4 for allthe commodity cointegrated pairs in the backtesing period.

Stochastic Spread Pairs Trading in the Indian Commodity Market