Does Intraday Momentum Exist in the Crude Oil Market

Day trading is a popular discussion topic in the practitioners’ literature, the blogosphere, and social media. It receives,  however, less attention in the academic community.

We have previously discussed a paper on the intraday momentum in the stock indices. Reference [1] extended the research to the oil market. It used USO, an oil ETF, 1- minute data to conduct studies. The authors reached several interesting conclusions,

First, our study reveals that the first half-hour return of a trading day significantly predicts the last half hour return of that day, both in sample (IS) and out of sample (OS). For the IS analysis, the predictive value is 0.729%, and the predictive power of the first half-hour returns is further confirmed with an OS R-squared value of 0.659%, both values being economically sizable and much higher than those of monthly predictors…

Second, since intraday predictability varies across crisis and noncrisis periods, we split our sample into crisis and non-crisis periods, the former encompassing two crises: the global financial crisis from June 1, 2008, to January 31, 2009, and the oil market crisis from June 1, 2014, to January 31, 2016 (e.g., Gao et al., 2018). We find that predictability is especially strong during the crisis periods, with a predictive value of 1.923%, a level of predictability that substantially exceeds the predictive value of 0.335% during non-crisis periods…

Third, we find that the predictive power of the first half-hour returns is stronger when the first half hour’s trading has higher realized volatility, higher trading volume, and significant overnight return jumps, all of which are associated with high overnight uncertainty…

Fourth, our next step is to assess economic values by using the predictability of the first half-hour return as a trading signal in a market timing strategy. Specifically, if r1 is positive (negative), we take a long (short) position at the beginning of the first half hour and close the position at the end of the last half hour. Our results show that this market timing strategy significantly outperforms two other benchmark strategies

In brief, intraday momentum also exists in the crude oil market, and a profitable day trading strategy can be developed.

These findings are consistent with our observations and experience. It would be interesting to see how the trading strategy would perform during the pandemic, especially when the price of the front-month oil futures went negative.

References

[1] Z. Wen, X. Gong, D. Ma, Y. Xu, Intraday momentum and return predictability: Evidence from the crude oil market, Economic Modelling, Volume 95, February 2021, p. 374

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