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Long memory and structural breaks in commodity futures markets

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  • Jerry Coakley
  • Jian Dollery
  • Neil Kellard

Abstract

This study employs daily data for 14 commodities and three financial assets 1990–2009 to explore the impact of the time series properties of the futures‐spot basis and the cost of carry on forward market unbiasedness. The main result is that the basis of 16 assets exhibits both long memory and structural breaks. The long memory in the basis is robust even to the use of break‐adjusted data. It implies that the cost‐of‐carry has long memory which the empirical results confirm using the interest cost as a proxy. These new findings suggest that the forecast error has long memory and are inconsistent with unbiasedness. They could be consistent with a weaker version of market efficiency in the presence of a fractionally integrated, time‐varying risk premium but they could also be rationalized by priced noise trader risk with limits to arbitrage in less than fully efficient markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

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  • Jerry Coakley & Jian Dollery & Neil Kellard, 2011. "Long memory and structural breaks in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(11), pages 1076-1113, November.
  • Handle: RePEc:wly:jfutmk:v:31:y:2011:i:11:p:1076-1113
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    Cited by:

    1. Dolatabadi, Sepideh & Nielsen, Morten Ørregaard & Xu, Ke, 2016. "A fractionally cointegrated VAR model with deterministic trends and application to commodity futures markets," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 623-639.
    2. Sepideh Dolatabadi & Morten Ørregaard Nielsen & Ke Xu, 2015. "A Fractionally Cointegrated VAR Analysis of Price Discovery in Commodity Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(4), pages 339-356, April.
    3. repec:kap:rqfnac:v:48:y:2017:i:3:d:10.1007_s11156-016-0569-x is not listed on IDEAS
    4. Kellard, Neil M. & Jiang, Ying & Wohar, Mark, 2015. "Spurious long memory, uncommon breaks and the implied–realized volatility puzzle," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 36-54.
    5. Cummins, Mark & Dowling, Michael & Lucey, Brian M., 2015. "Behavioral influences in non-ferrous metals prices," Resources Policy, Elsevier, vol. 45(C), pages 9-22.
    6. Dennis Alvaro & Ángel Guillén & Gabriel Rodríguez, 2017. "Modelling the volatility of commodities prices using a stochastic volatility model with random level shifts," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(1), pages 71-103, February.
    7. repec:eee:finana:v:57:y:2018:i:c:p:246-256 is not listed on IDEAS
    8. Tsung-Wu Ho & Wan-Shin Mo, 2016. "Testing the Persistence of the Forward Premium: Structural Changes or Misspecification?," Open Economies Review, Springer, vol. 27(1), pages 119-138, February.
    9. Seth J. Kopchak, 2016. "The regime-switching risk premium in the gold futures market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(3), pages 472-491, July.

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