FSSOP2012 - Knowledge
FINANCIAL STATISTICS FINAL ASSESSMENT
The spreadsheet entitled Data for Fin Stats Final provides the weekly return for Crude Oil
from Feb 1996 to December 31 2010 in Column B, Commercial Hedging Pressure (CHP) for
Crude Oil in Column C and the return on the S&P 500 index in Column D. You need to
construct a number of active trading strategies for Crude using lagged CHP, and interpret the
performance of these strategies.
1) First compute the correlation between the weekly return on Crude and lagged Crude
CHP, that is CHP for the previous week. Do this for the entire sample period and also
for each half of the sample period. Are the various correlations significant? What does
the sign of the correlation tell you about potential trading strategies
2) We will consider two sorts of trading strategies. The first is the 50% trading strategy
that is based on whether CHP in the previous week was greater or less than 0.5. The
second is the normalized trading strategy. For this you will need to subtract from CHP
in a given week , its 52 week trailing mean (ie based on the previous 52 weeks) and
divide by its 52 week trailing standard deviation-this will be called normalized CHP.
3) Based on the sign of the correlation construct both long-short and long-flat 50% and
normalized trading strategies. The long short strategies will go long and otherwise
short and the long flat will only go long. The strategies need to go long short or long
flat according as CHP is above/below 50% or normalized CHP is above/below zero.
When you go long or short will depend on the sign of the correlation. You may try
other strategies for extra credit, but these must be well motivated otherwise no credit
will be given.
4) Study the performance of these strategies using the various measures analyzed in
class. In particular, study alphas relative to the S&P. Use all of these to create a
marketing pitch for a client who is interested in the following two issues
i)
Should I consider an active strategy in Crude Oil rather than a passive buy and
hold strategy
ii)
Should I consider an active strategy in Crude Oil over a buy and hold strategy
in the S&P 500.
Please submit a report of no more than 1000 words (excluding tables and graphs) and submit
it via Dropbox for the Financial Statistics course. Please do not send via e-mail.
5) BONUS: Use the crude CHP data to construct active strategies for the SP 500 as
above focusing on the post 2000 period. The logic of this is the following: Ever since
about 2000 many financial players have entered the commodities market and their
views tend to be more macro oriented and it is thus possible that crude CHP might
have predictive power for the S&P.
The spreadsheet entitled Data for Fin Stats Final provides the weekly return for Crude Oil
from Feb 1996 to December 31 2010 in Column B, Commercial Hedging Pressure (CHP) for
Crude Oil in Column C and the return on the S&P 500 index in Column D. You need to
construct a number of active trading strategies for Crude using lagged CHP, and interpret the
performance of these strategies.
1) First compute the correlation between the weekly return on Crude and lagged Crude
CHP, that is CHP for the previous week. Do this for the entire sample period and also
for each half of the sample period. Are the various correlations significant? What does
the sign of the correlation tell you about potential trading strategies
2) We will consider two sorts of trading strategies. The first is the 50% trading strategy
that is based on whether CHP in the previous week was greater or less than 0.5. The
second is the normalized trading strategy. For this you will need to subtract from CHP
in a given week , its 52 week trailing mean (ie based on the previous 52 weeks) and
divide by its 52 week trailing standard deviation-this will be called normalized CHP.
3) Based on the sign of the correlation construct both long-short and long-flat 50% and
normalized trading strategies. The long short strategies will go long and otherwise
short and the long flat will only go long. The strategies need to go long short or long
flat according as CHP is above/below 50% or normalized CHP is above/below zero.
When you go long or short will depend on the sign of the correlation. You may try
other strategies for extra credit, but these must be well motivated otherwise no credit
will be given.
4) Study the performance of these strategies using the various measures analyzed in
class. In particular, study alphas relative to the S&P. Use all of these to create a
marketing pitch for a client who is interested in the following two issues
i)
Should I consider an active strategy in Crude Oil rather than a passive buy and
hold strategy
ii)
Should I consider an active strategy in Crude Oil over a buy and hold strategy
in the S&P 500.
Please submit a report of no more than 1000 words (excluding tables and graphs) and submit
it via Dropbox for the Financial Statistics course. Please do not send via e-mail.
5) BONUS: Use the crude CHP data to construct active strategies for the SP 500 as
above focusing on the post 2000 period. The logic of this is the following: Ever since
about 2000 many financial players have entered the commodities market and their
views tend to be more macro oriented and it is thus possible that crude CHP might
have predictive power for the S&P.