Metals futures market: a comparative analysis of investment and arbitrage strategies

Abstract

The article deals with the application of optimal portfolio theory and pair trading theory on the metals futures market. Advantages of the futures market over the spot market include relatively small initial price, low transaction costs, and high volatility. The main aim of the study is to explore the potential of both strategies for effective trading. The following financial instruments were chosen as the inputs of the models: futures on industrial metals (aluminum, copper, nickel, zinc, lead, tin), futures on precious metals (gold and silver). When building the optimal portfolio, it was decided to include Dow Jones Index futures and S&P Index futures among metals. This is because these instruments are extremely volatile and may play the role of a hedge in the portfolio. A drawdown indicator was used to assess the effectiveness of each strategy. The results show that both strategies can be applied on the real-life market. The final choice will depend on the level of risk taking by investors and the desired value of return.