Correlation Between Crude Oil and Soybean Futures

Can any of the company-specific risk be diversified away by investing in both Crude Oil and Soybean Futures at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Crude Oil and Soybean Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Crude Oil and Soybean Futures, you can compare the effects of market volatilities on Crude Oil and Soybean Futures and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Crude Oil with a short position of Soybean Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Crude Oil and Soybean Futures.

Diversification Opportunities for Crude Oil and Soybean Futures

0.4

Correlation Coefficient

Crude Oil  Soybean Futures

Very weak diversification

The 3 months correlation between Crude and Soybean is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Crude Oil and Soybean Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Soybean Futures and Crude Oil is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Crude Oil are associated (or correlated) with Soybean Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Soybean Futures has no effect on the direction of Crude Oil i.e., Crude Oil and Soybean Futures go up and down completely randomly.

Pair Corralation between Crude Oil and Soybean Futures

Assuming the 90 days horizon Crude Oil is expected to under-perform the Soybean Futures. In addition to that, Crude Oil is 1.3 times more volatile than Soybean Futures. It trades about -0.02 of its total potential returns per unit of risk. Soybean Futures is currently generating about 0.05 per unit of volatility. If you would invest  99,175  in Soybean Futures on December 29, 2024 and sell it today you would earn a total of  3,125  from holding Soybean Futures or generate 3.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

Crude Oil  vs.  Soybean Futures

Crude Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Crude Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Crude Oil is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Soybean Futures

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Soybean Futures are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Soybean Futures is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Crude Oil and Soybean Futures

The main advantage of trading using opposite Crude Oil and Soybean Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Crude Oil position performs unexpectedly, Soybean Futures can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Soybean Futures will offset losses from the drop in Soybean Futures' long position.

The idea behind Crude Oil and Soybean Futures pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .