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Speculative Activity and Copper Price

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  • Patricio Jaramillo
  • Jorge Selaive

Abstract

In the last few years, we have observed a significant boot in copper prices which has been accompanied with a larger share of speculators who trade in this market based on reasons different to production or processing of the metal. In fact, long positions of speculators increased from 25% in 2002 to 47% in 2005. In this work, we build a comprehensive weekly database with positions of noncommercials agents in the copper futures market for the period 1992 -2006, to analyze its association with the level and volatility of copper prices. Our results support the view that speculators do not have permanent effects on the level of prices, although they may play a significant role in transitory movements of prices. Once we explore the role in the amplitude of price fluctuations, we find a positive but no significant effect of speculators´ positions in the volatility. Based on the results, it is advisably to follow the positions of speculators to improve the understanding of short-term variations in copper prices.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 384.

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Date of creation: Dec 2006
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Handle: RePEc:chb:bcchwp:384

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  1. Thomas Klitgaard & Laura Weir, 2004. "Exchange rate changes and net positions of speculators in the futures market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 17-28.
  2. Sanford J. Grossman, 1989. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," NBER Working Papers 2357, National Bureau of Economic Research, Inc.
  3. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  6. Esteban Jadresic & Jorge Selaive, 2005. "Is The FX Derivatives Market Effective and Efficient in Reducing Currency Risk?," Working Papers Central Bank of Chile 325, Central Bank of Chile.
  7. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  8. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  9. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
  10. Fleming, Jeff & Ostdiek, Barbara, 1999. "The impact of energy derivatives on the crude oil market," Energy Economics, Elsevier, vol. 21(2), pages 135-167, April.
  11. Rünstler, Gerhard & Jumah, Adusei & Karbuz, Sohbet, 1995. "Arbitrage in Commodity Markets: A Full Systems Cointegration Analysis," Economics Series 4, Institute for Advanced Studies.
  12. Dale, Charles & Zyren, John, 1996. "Noncommercial Trading in the Energy Futures Market," MPRA Paper 47463, University Library of Munich, Germany.
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