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.
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Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Economics 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
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