Commodities vs. commodity stocks

May 2, 2011
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[This article was first published on Commodity Stat Arb, and kindly contributed to R-bloggers]. (You can report issue about the content on this page here)
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Just got back from a couple of months vacation in NZ so brief posting this month.
Another common field of mean reversion analysis relates to commodities and commodity related stocks.  In this analysis, I compare the prompt month crude oil price, CL1 to the price of XOP, an ETF that invests in oil & gas exploration & production companies.
As expected, these two prices track each other fairly closely over time:

 A similar analysis as before, performing an ADF test suggests that over its history the ratio of price series has exhibited mean reversion characteristics with a half life of 37 trading days or approximately two months.  This isn’t ideal for trading; it would be preferable if the relationship exerted itself more strongly.  Nevertheless with an ADF test statistic of 4% the evidence seems strong.
This relationship can be generalized to other commodities and commodity equity groupings, providing a guide to over/under valuation of commodity equities in relationship to their corresponding commodity prices.

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