Misspricings in global energy markets

Abstract

Financial market participants can benefit from understanding how shocks affect equity mispricings. Energy corporates have been exposed to multiple structural changes over the past decades. This paper applies the pairs trading algorithm of (Figuerola-Ferretti, Paraskevopoulos, and Tang 2018) (Journal of Futures Markets, 2018) to analysemean reversion of cointegrated stocks in global energy equity markets. Using daily data covering the US, Europe and Asia we report positive risk adjusted returns that supersede their corresponding equity index counterparts. Pairs trading profitability is enhanced when filtering stocks with the measure of capital expenditure (CAPEX).Keywords:Mispricings, Energy markets, Energy transition, Pairs trading

Financial market participants can benefit from understanding how shocks affect equity mispricings. Energy corporates have been exposed to multiple structural changes over the past decades. This paper applies the pairs trading algorithm of (Figuerola-Ferretti, Paraskevopoulos, and Tang 2018) (Journal of Futures Markets, 2018) to analysemean reversion of cointegrated stocks in global energy equity markets. Using daily data covering the US, Europe and Asia we report positive risk adjusted returns that supersede their corresponding equity index counterparts. Pairs trading profitability is enhanced when filtering stocks with the measure of capital expenditure (CAPEX).