Correlation Between Cotton and Oat Futures

Can any of the company-specific risk be diversified away by investing in both Cotton and Oat 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 Cotton and Oat Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cotton and Oat Futures, you can compare the effects of market volatilities on Cotton and Oat 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 Cotton with a short position of Oat Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cotton and Oat Futures.

Diversification Opportunities for Cotton and Oat Futures

-0.71

Correlation Coefficient

Cotton  Oat Futures

Pay attention - limited upside

The 3 months correlation between Cotton and Oat is -0.71. Overlapping area represents the amount of risk that can be diversified away by holding Cotton and Oat Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Oat Futures and Cotton 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 Cotton are associated (or correlated) with Oat Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Oat Futures has no effect on the direction of Cotton i.e., Cotton and Oat Futures go up and down completely randomly.

Pair Corralation between Cotton and Oat Futures

Assuming the 90 days horizon Cotton is expected to under-perform the Oat Futures. But the commodity apears to be less risky and, when comparing its historical volatility, Cotton is 1.76 times less risky than Oat Futures. The commodity trades about -0.03 of its potential returns per unit of risk. The Oat Futures is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  32,400  in Oat Futures on December 28, 2024 and sell it today you would earn a total of  3,300  from holding Oat Futures or generate 10.19% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Cotton  vs.  Oat Futures

Cotton

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cotton has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Cotton is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Oat Futures

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Oat Futures are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Oat Futures may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Cotton and Oat Futures

The main advantage of trading using opposite Cotton and Oat Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cotton position performs unexpectedly, Oat 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 Oat Futures will offset losses from the drop in Oat Futures' long position.

The idea behind Cotton and Oat 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.