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Causality in the aluminum market

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  • Clark, Andrew

Abstract

Wavelets based on undifferenced cash and futures log are used to determine causality in the aluminum markets. Wavelets are used versus I(d) processes as daily I(d)s adjusted for conditional heteroskedasticity, are not second-order stationary. Weekly I(d)s are second-order stationary after accounting for conditional heteroskedasticity but are found to be less informative than weekly wavelets in terms of causality. Wavelets exhibit causality at most daily time scales up to 2 years and weekly time scales up to 5 years. As causality exists between cash and futures in both the short and long term, the aluminum market meets the first condition of market efficiency. The daily cost-of-carry-model is supported, and as causality is determined without reference to I(d)s, there is increased confidence in the setting of initial hedge ratios.

Suggested Citation

  • Clark, Andrew, 2022. "Causality in the aluminum market," Journal of Commodity Markets, Elsevier, vol. 27(C).
    • Handle: RePEc:eee:jocoma:v:27:y:2022:i:c:s2405851321000532
    DOI: 10.1016/j.jcomm.2021.100220
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    References listed on IDEAS

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    More about this item

    Keywords

    Wavelets; Granger causality; Transfer entropy; Integrated I(d); Second-order stationarity;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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