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Futures Price Volatility in Commodities Markets: The Role of Short Term vs Long Term Speculation

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  • Matteo Manera

    (University of Milan-Bicocca, Milan, and Fondazione Eni Enrico Mattei, Milan)

  • Marcella Nicolini

    (University of Pavia, Pavia, and Fondazione Eni Enrico Mattei, Milan)

Abstract

This paper evaluates how different types of speculation affect the volatility of commodities’ futures prices. We adopt four indexes of speculation: Working’s T, the market share of non-commercial traders, the percentage of net long speculators over total open interest in future markets, which proxy for long term speculation, and scalping, which proxies for short term speculation. We consider four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) and seven non-energy commodities (cocoa, coffee, corn, oats, soybean oil, soybeans and wheat) over the period 1986-2010 analyzed at weekly frequency. Using GARCH models we find that speculation significantly affects volatility of returns: short term speculation has a positive and significant impact on volatility, while long term speculation generally has a negative effect. The robustness exercise shows that: i) scalping is positive and significant also at higher and lower data frequencies; ii) results remain unchanged through different model specifications (GARCH-in-mean, EGARCH, and TARCH); iii) results are robust to different specifications of the mean equation.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.45.

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Date of creation: May 2013
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Handle: RePEc:fem:femwpa:2013.45

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Keywords: Commodities Futures Markets; Speculation; Scalping; Working’s T; Data Frequency; GARCH Models;

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  1. Xiaodong Du & Cindy L. Yu & Dermot J. Hayes, 2009. "Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: A Bayesian Analysis," Food and Agricultural Policy Research Institute (FAPRI) Publications 09-wp491, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  2. Chevallier, Julien, 2009. "Carbon futures and macroeconomic risk factors : a view from the EU ETS," Economics Papers from University Paris Dauphine 123456789/4210, Paris Dauphine University.
  3. Stein, Jeremy C., 1987. "Informational Externalities and Welfare-Reducing Speculation," Scholarly Articles 3660740, Harvard University Department of Economics.
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  6. Sanders, Dwight R. & Boris, Keith & Manfredo, Mark, 2004. "Hedgers, funds, and small speculators in the energy futures markets: an analysis of the CFTC's Commitments of Traders reports," Energy Economics, Elsevier, vol. 26(3), pages 425-445, May.
  7. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
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  9. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-52, October.
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  12. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
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  14. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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  16. 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.
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