IDEAS home Printed from https://ideas.repec.org/a/wly/ajagec/v105y2023i1p122-143.html
   My bibliography  Save this article

A dynamic analysis of the distribution of commodity futures and spot prices

Author

Listed:
  • Jian Li
  • Jean‐Paul Chavas

Abstract

This paper investigates the role of futures markets and their dynamic effects on the stability of commodity prices. The analysis is based on combining two econometric approaches: a quantile vector autoregression (QVAR) model of the marginal distributions of futures and spot prices, and a copula of their joint distribution. Applied to the US soybean and corn markets over the period of 1980–2019, the econometric investigation finds evidence of nonlinear price dynamics that depend on the maturity of the futures contract and documents how marginal price distributions and associated moments evolve over time. Based on the estimates of the QVAR model, we provide evidence of local instability in the upper tail of the price distributions. We find that the futures market helps stabilize the market under nearby futures contract maturity. We document the presence of nonlinear cointegration relationships between futures and spot price. Relying on a copula, we find a positive contemporaneous codependence between futures price and spot price across all quantiles, codependence that varies with the futures contract maturity. We also present evidence of a time‐varying basis that affects the convergence properties of the futures and spot price. Our findings shed new light on the joint determination of futures and spot price in commodity markets.

Suggested Citation

  • Jian Li & Jean‐Paul Chavas, 2023. "A dynamic analysis of the distribution of commodity futures and spot prices," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(1), pages 122-143, January.
    • Handle: RePEc:wly:ajagec:v:105:y:2023:i:1:p:122-143
    DOI: 10.1111/ajae.12309
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ajae.12309
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ajae.12309?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Guesnerie, Roger & Rochet, Jean-Charles, 1993. "(De)stabilizing speculation on futures markets : An alternative view point," European Economic Review, Elsevier, vol. 37(5), pages 1043-1063, June.
    2. Jian Li & Jean-Paul Chavas & Xiaoli L. Etienne & Chongguang Li, 2017. "Commodity price bubbles and macroeconomics: evidence from the Chinese agricultural markets," Agricultural Economics, International Association of Agricultural Economists, vol. 48(6), pages 755-768, November.
    3. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    4. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399.
    5. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(2), August.
    6. Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "The Economics of Food Price Volatility," NBER Books, National Bureau of Economic Research, Inc, number chav12-1, March.
    7. Xiao, Zhijie, 2009. "Quantile cointegrating regression," Journal of Econometrics, Elsevier, vol. 150(2), pages 248-260, June.
    8. Chavas, Jean-Paul & Hummels, David & Wright, Brian D. (ed.), 2014. "The Economics of Food Price Volatility," National Bureau of Economic Research Books, University of Chicago Press, number 9780226128924, December.
    9. Du, Xiaodong & Yu, Cindy L. & Hayes, Dermot J., 2011. "Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis," Energy Economics, Elsevier, vol. 33(3), pages 497-503, May.
    10. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
    11. Roger Koenker & Zhijie Xiao, 2004. "Unit Root Quantile Autoregression Inference," Journal of the American Statistical Association, American Statistical Association, vol. 99, pages 775-787, January.
    12. Jean-Paul Chavas, 2021. "The dynamics and volatility of prices in multiple markets: a quantile approach," Empirical Economics, Springer, vol. 60(4), pages 1607-1628, April.
    13. Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "Introduction to "The Economics of Food Price Volatility"," NBER Chapters, in: The Economics of Food Price Volatility, pages 1-11, National Bureau of Economic Research, Inc.
    14. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-297, May.
    15. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, Decembrie.
    16. Andrew J. Patton, 2006. "Modelling Asymmetric Exchange Rate Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 527-556, May.
    17. Jean‐Paul Chavas & Jian Li, 2020. "A quantile autoregression analysis of price volatility in agricultural markets," Agricultural Economics, International Association of Agricultural Economists, vol. 51(2), pages 273-289, March.
    18. Daal, Elton & Farhat, Joseph & Wei, Peihwang P., 2006. "Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts," Review of Financial Economics, Elsevier, vol. 15(2), pages 113-128.
    19. Eugene F. Fama & Kenneth R. French, 2015. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 4, pages 79-102, World Scientific Publishing Co. Pte. Ltd..
    20. Ronald Britto, 1984. "The Simultaneous Determination of Spot and Futures Prices in a Simple Model with Production Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(2), pages 351-365.
    21. Lee, Chien-Chiang & Zeng, Jhih-Hong, 2011. "Revisiting the relationship between spot and futures oil prices: Evidence from quantile cointegrating regression," Energy Economics, Elsevier, vol. 33(5), pages 924-935, September.
    22. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-1387, September.
    23. C. W. Morgan, 1999. "Futures Markets and Spot Price Volatility: A Case Study," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 247-257, May.
    24. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
    25. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    26. Abby Kim, 2015. "Does Futures Speculation Destabilize Commodity Markets?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(8), pages 696-714, August.
    27. Elton Daal & Joseph Farhat & Peihwang P. Wei, 2006. "Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts," Review of Financial Economics, John Wiley & Sons, vol. 15(2), pages 113-128.
    28. Dabin Wang & William G. Tomek, 2007. "Commodity Prices and Unit Root Tests," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 873-889.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ye Chen & Jian Li & Qiyuan Li, 2023. "Seemingly Unrelated Regression Estimation for VAR Models with Explosive Roots," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(4), pages 910-937, August.
    2. Yun-Shi Dai & Peng-Fei Dai & Wei-Xing Zhou, 2023. "Tail dependence structure and extreme risk spillover effects between the international agricultural futures and spot markets," Papers 2303.11030, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean-Paul Chavas, 2021. "The dynamics and volatility of prices in multiple markets: a quantile approach," Empirical Economics, Springer, vol. 60(4), pages 1607-1628, April.
    2. Dimpfl, Thomas & Flad, Michael & Jung, Robert C., 2017. "Price discovery in agricultural commodity markets in the presence of futures speculation," Journal of Commodity Markets, Elsevier, vol. 5(C), pages 50-62.
    3. Bozic, Marin, 2011. "Three essays in commodity futures and options price performance," Faculty and Alumni Dissertations 160678, University of Minnesota, Department of Applied Economics.
    4. Jean‐Paul Chavas & Fanghui Pan, 2020. "The Dynamics and Volatility of Prices in a Vertical Sector," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 353-369, January.
    5. Jean‐Paul Chavas & Jian Li, 2020. "A quantile autoregression analysis of price volatility in agricultural markets," Agricultural Economics, International Association of Agricultural Economists, vol. 51(2), pages 273-289, March.
    6. Carlotta Penone & Elisa Giampietri & Samuele Trestini, 2022. "Futures–spot price transmission in EU corn markets," Agribusiness, John Wiley & Sons, Ltd., vol. 38(3), pages 679-709, July.
    7. Li, J. & Chavas, J.-P., 2018. "How Have China s Agricultural Price Support Policies Affected Market Prices?: A Quantile Regression Evaluation," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277557, International Association of Agricultural Economists.
    8. Haiqi Li Author-Name-First: Haiqi & Jing Zhang & Chaowen Zheng, 2023. "Estimating and Testing for Functional Coefficient Quantile Cointegrating Regression," Economics Discussion Papers em-dp2023-07, Department of Economics, University of Reading.
    9. Chavas, Jean-Paul & Li, Jian, 2017. "The Effects of Private Stocks versus Public Stocks on Food Price Volatility," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259185, Agricultural and Applied Economics Association.
    10. Mihaela Nicolau, 2012. "Do Spot Prices Move towards Futures Prices? A study on Crude Oil Market," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 5(5), pages 166-176, October.
    11. Troster, Victor & Shahbaz, Muhammad & Uddin, Gazi Salah, 2018. "Renewable energy, oil prices, and economic activity: A Granger-causality in quantiles analysis," Energy Economics, Elsevier, vol. 70(C), pages 440-452.
    12. Aliaga Lordemann, Javier & Mora-García, Claudio & Mulder, Nanno, 2021. "Speculation and price volatility in the coffee market," Documentos de Proyectos 46923, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    13. Martin T. Bohl & Christoph Sulewski, 2018. "The Impact of Long-Short Speculators on the Volatility of Agricultural Commodity Futures Prices," CQE Working Papers 7718, Center for Quantitative Economics (CQE), University of Muenster.
    14. Chavas, Jean-Paul & Li, Jian, 2016. "On the Economics of Commodity Price Dynamics and Price Volatility," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235070, Agricultural and Applied Economics Association.
    15. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    16. repec:awi:wpaper:0665 is not listed on IDEAS
    17. Czudaj Robert L., 2020. "The role of uncertainty on agricultural futures markets momentum trading and volatility," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(3), pages 1-39, June.
    18. Areal, Francisco José & Balcombe, Kevin & Rapsomanikis, George, 2016. "Testing for bubbles in agriculture commodity markets," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 16(01), June.
    19. Chien-Chiang Lee & Chin-Yu Wang & Jhih-Hong Zeng, 2017. "Housing price–volume correlations and boom–bust cycles," Empirical Economics, Springer, vol. 52(4), pages 1423-1450, June.
    20. Wurm, Laura, 2021. "Strangling speculation: The effect of the 1903 Viennese futures trading ban," QUCEH Working Paper Series 21-09, Queen's University Belfast, Queen's University Centre for Economic History.
    21. Christou, Christina & Gupta, Rangan & Nyakabawo, Wendy & Wohar, Mark E., 2018. "Do house prices hedge inflation in the US? A quantile cointegration approach," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 15-26.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:ajagec:v:105:y:2023:i:1:p:122-143. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1467-8276 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.