Threshold Autoregressive Models of the Commodities Futures Basis
AbstractThe focus in this paper is on the time series dynamics of the basis for commodity futures. These have special interest since regulation of commodity markets is much laxer than is typical for stock markets. However, although such futures contracts have been traded for several decades, they have been subject to far less scrutiny that stock index futures. We redress the balance by assessing the controversial hypothesis of Keynes and Hicks that such markets will typically exist in a state of backwardation, occurring when the contemporaneous futures price is below the expected future spot price. A two-regime threshold autoregressive (TAR) model of the basis is applied to five heavily traded agricultural commodities: cocoa, coffee, corn, oats and wheat. Moreover, a novel step methodology is used to estimate the expected future spot rate and account for the unobserved convenience yield. Over the period 1990 to 2005 statistically significant evidence is found supporting Keynes' theory. Strikingly, the great majority of series in contango regime are mean reverting, whilst those in the backwardation regime behave like a random walk. We conclude that significant differences in basis dynamics are present among differing regimes
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 323.
Date of creation: 04 Jul 2006
Date of revision:
Contango; normal backwardation; basis dynamics; TAR; convenience yield; agricultural commodities;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.