QUANTITATIVE DEBATE- KIM BENNI & OLIVIER MERLE -

MYTH BUSTERSQUANTITATIVE DEBATE

Markets are full of myths and proverbs. We sometimes use them to buy or sell.

But can we rely on these myths?

Let's check these myths by using the quantitative analysis.

MYTH BUSTERSQUANTITATIVE DEBATE

Myth or truth:Tuesday reversal ?Very short funds is bearish ? El Nino decrease US corn and soybean yields

The US Dollar is king in commodity markets ?Nowadays sophisticated lightning-fast algorithms

prevent any price arbitrage ?

MYTH BUSTERSMYTH #1: TUESDAY REVERSAL

Tuesday reversal: The market go lower (respectively higher) Tuesday after

recent higher (respectively lower) price.

Do you believe in it ?

MYTH BUSTERSMYTH #1: TUESDAY REVERSAL We tested Tuesday reversal on the most liquid corn, soybean and wheat

expiry from 2006 to 2016. We calculated if a 2, 3 or 4 days trend is followed by a reversal.

Example: After 2 days up on the most liquid corn expiry we have a 51 % probability of a Tuesday reversal which is inside the confidence interval.

There is no statistically significant Tuesday reversal. However there is a Tuesday "continuation" on corn after 4 days up at 77 % (or 23 % reversal probability).

Case Tuesday reversal on Corn

Tuesday reversal on Soybean

Tuesday reversal on Wheat

Confidence interval

Past 2 days up 51 % 52 % 51 % 42 % - 58 %Past 2 days down 53 % 55 % 45 % 42 % - 58 %Past 3 days up 42 % 56 % 58 % 38 % - 62 %Past 3 days down 54 % 44 % 45 % 38 % - 62 %Past 4 days up 23 % 64 % 55 % 31 % - 69 %Past 4 days down 55 % 38 % 38 % 31 % - 69 %

MYTH BUSTERSMYTH #1: TUESDAY REVERSAL

However... if we test Tuesday reversal on the last 30 years...

In green, statistically significant Tuesday reversal. Tuesday reversal is statistically significant in 50 % of the case and is the most

likely case in 94 % of the cases.

Case Tuesday reversal on Corn

Tuesday reversal on Soybean

Tuesday reversal on Wheat

Confidence interval

Past 2 days up 56 % 56 % 54 % 45 % - 55 %

Past 2 days down 53 % 61 % 52 % 45 % - 55 %

Past 3 days up 52 % 58 % 62 % 43 % - 57 %

Past 3 days down 57 % 61 % 52 % 43 % - 57 %

Past 4 days up 54 % 61 % 60 % 38 % - 62 %

Past 4 days down 64 % 70 % 48 % 38 % - 62 %

MYTH BUSTERSMYTH #1: TUESDAY REVERSAL

Myth busted !Tuesday reversal is not workingHowever, Tuesday reversal was working !

MYTH BUSTERSMYTH #2: FUNDS VERY LONG IS BEARISH, FUNDS VERY SHORT IS BULLISH ?

A lot of operators think that when funds are very long, the market is bearish

And when funds are very short, the market bullish

Do you believe in it ?

MYTH BUSTERSMYTH #2: FUNDS VERY LONG IS BEARISH, FUNDS VERY SHORT IS BULLISH ?

We tested this myth by buying the market for one month when funds entered a very short position. And selling the market for on month when funds a very long position.

Funds are longEnter a short trade when funds positions are historically in

their 1% most long position:Short in 4 trades: 1.8 %/trade

10 % most long position:Short in 12 trades: -2.1 %/trade

MYTH BUSTERSMYTH #2: FUNDS VERY LONG IS BEARISH, FUNDS VERY SHORT IS BULLISH ?

Funds are shortEnter a long trade when funds positions are historically in their

1% most short position:- Long in 24 trades: -0.2 %/trade

10 % most short position:- Long in 42 trades: 1.5 %/trade

MYTH BUSTERSMYTH #2: FUNDS VERY LONG IS BEARISH, FUNDS VERY SHORT IS BULLISH ?

Myth Busted !Nothing obvious on the impact of funds position

MYTH BUSTERSMYTH #3: EL NINO IMPACT YIELDS ?

In may 2016, many markets participants thought that El Nino could decrease US yield.

Do you believe in it ?

MYTH BUSTERSMYTH #3: EL NINO IMPACT YIELDS ? We tested the myth by comparing the Ocean Nino Index (ONI)

which measure the strength of El Nino against US soybean yields.

MYTH BUSTERSMYTH #3: EL NINO IMPACT YIELDS ?

El Nino impact in May 2016 was very light at 0,1 t/ha in Corn and 0,046 t/ha in Soybean.

MYTH BUSTERSMYTH #3: EL NINO IMPACT YIELDS ?

Myth busted !

And in almost all cases we tested, on different countries, crops and months, El Nino has no significant impact on yields...

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?

A large proportion of fundamental & technical traders alike thinks commodities should be analyzed in USD ? Most of them are physically or financially traded in USD anyway !

Should you analyze commodity prices in USD or not ?

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Russian Ruble (lhs) Brent crude oil 1Y forward in USD/barrel (rhs)

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?Let’s start with crude oil !

Correlation wizardryDaily returns ~50%Weekly returns ~60%Monthly returns ~75%

What we are looking for is mean-reversion of the spread not correlation

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?What is the impact of a weak Ruble to other Russian

exports like wheat or fertilizers then ?

Share of Russian exports in 2015

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?Now sugar !

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Brazilian Real (lhs) Raw sugar 1Y forward in USD per pound (rhs)

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?Most countries that matters in sugar production & trading

have currencies unrelated to the USD

Share of sugar exports in 2015

MYTH BUSTERSMYTH #4: THE US DOLLAR IS KING IN COMMODITIES ?

Myth busted !

One should pay attention to USD prices and to local-currency prices as producers adjust production and switch crop according to local-currency returns

USD is relevant in comparing price levels but is not enough to analyze price dynamics

MYTH BUSTERSMYTH #5: MARKETS ARE EFFICIENTS ?

A famous concept in finance is that markets are efficient and in particular it means that market participants reacts rationally and immediately to news

Do you believe it to be true for grains ?

MYTH BUSTERSMYTH #5: ARE MARKET EFFICIENT ? Let’s look at MATIF Wheat May17 to LIFFE Wheat May17 spread in Euros /MT

8/12/1

6 13:28

19/12/16 16:49

9/12/1

6 12:22

13/12/16 13:28

20/12/1

6 14:35

9/12/1

6 13:28

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15/12/16 13:28

19/12/16 15:42

16/12/16 13:28

12/12/16 14:35

15/12/16 14:35

9/12/1

6 14:00

13/12/16 12:00

15/12/16 14:00

0.0 €

0.5 €

1.0 €

1.5 €

2.0 €

2.5 €

1 minute high/low swing - trades grouped by 5 sec window

12/8/2016 2:00 12/9/2016 19:58 12/14/2016 2:00 12/16/2016 3:22 12/20/2016 9:062.5 €

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Spread in €/T

MYTH BUSTERSMYTH #5: MARKETS ARE EFFICIENTS ?

Myth busted !

It takes about 1 minute to arbitrage MATIF to LIFFE, as brokerage in grain futures & FX is still partially manual at a lot of trading businesses