Commodity Futures Returns: A Non Linear Markov Regime Switching Model of Hedging and Speculative Pressures
AbstractThis study introduces a non linear model for commodity futures prices which accounts for the pressures due to hedging and speculative activities. The interaction with the corresponding spot market is considered assuming that a long term equilibrium relationship holds between futures and spot pricing. Over the 1990-2010 time period, a dynamic interaction between spot and futures returns in five commodity markets (copper, cotton, oil, silver, and soybeans) is empirically validated. An error correction relationship for the cash returns and a non linear parameterization of the corresponding futures returns are combined with a bivariate CCC-GARCH representation of the conditional variances. Hedgers and speculators are contemporaneously at work in the futures markets, the role of the latter being far from negligible. Finally, in order to capture the consequences of the growing impact of financial flows on commodity market pricing, a two-state regime switching model for futures returns is developed. The empirical findings indicate that hedging and speculative behavior change significantly across the two regimes, which we associate with low and high return volatility. High volatility regimes are, as expected, characterized by a stronger impact of speculation on futures return dynamics.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze dell'Economia e Dell'Impresa in its series Working Papers Series with number wp2010_13.rdf.
Length: 34 pages
Date of creation: 2010
Date of revision:
Commodity spot and futures markets; dynamic hedging; speculation; non linear GARCH; Markov regime switching;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giorgio Ricchiuti).
If references are entirely missing, you can add them using this form.