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A dynamic model of hedging and speculation in the commodity futures markets

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  • Cifarelli, Giulio
  • Paladino, Giovanna

Abstract

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. In order to capture the consequences of the growing turbulence of these markets, a two-state regime-switching model for futures returns is developed. In this way financial traders׳ time-varying risk appetites are allowed to interact with hedgers׳ demand in determining both future and spot prices.

Suggested Citation

  • Cifarelli, Giulio & Paladino, Giovanna, 2015. "A dynamic model of hedging and speculation in the commodity futures markets," Journal of Financial Markets, Elsevier, vol. 25(C), pages 1-15.
  • Handle: RePEc:eee:finmar:v:25:y:2015:i:c:p:1-15
    DOI: 10.1016/j.finmar.2015.07.002
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    References listed on IDEAS

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    Cited by:

    1. Elina Pradkhan, 2016. "Information Content of Trading Activity in Precious Metals Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 421-456, May.
    2. repec:eee:eneeco:v:70:y:2018:i:c:p:545-562 is not listed on IDEAS
    3. repec:eee:finana:v:52:y:2017:i:c:p:292-308 is not listed on IDEAS
    4. Billio, Monica & Casarin, Roberto & Osuntuyi, Anthony, 2018. "Markov switching GARCH models for Bayesian hedging on energy futures markets," Energy Economics, Elsevier, vol. 70(C), pages 545-562.
    5. repec:gam:jijfss:v:6:y:2018:i:2:p:44-:d:141779 is not listed on IDEAS

    More about this item

    Keywords

    Commodity spot and futures markets; Dynamic hedging; Speculation; Non-linear GARCH; Markov regime switching;

    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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