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Hedging vs. speculative pressures on commodity futures returns

Author

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  • Cifarelli, Giulio
  • Paladino, Giovanna

Abstract

This study introduces a non linear model for commodity futures prices which accounts for pressures due to hedging and speculative activities. The linkage 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. 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 across the two regimes, which we associate with low and high return volatility, according to a distinctive pattern, which is not homogeneous across commodities.

Suggested Citation

  • Cifarelli, Giulio & Paladino, Giovanna, 2011. "Hedging vs. speculative pressures on commodity futures returns," MPRA Paper 28229, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28229
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    File URL: https://mpra.ub.uni-muenchen.de/28229/1/MPRA_paper_28229.pdf
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    References listed on IDEAS

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    3. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-630, November.
    4. Benninga, Simon & Eldor, Rafael & Zilcha, Itzhak, 1983. "Optimal hedging in the futures market under price uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 141-145.
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    Cited by:

    1. repec:eee:finana:v:54:y:2017:i:c:p:176-191 is not listed on IDEAS
    2. Cifarelli, Giulio & Paesani, Paolo, 2017. "On the difficulty of interpreting market behaviour in an uncertain world: the case of oil futures pricing between 2003 and 2016," MPRA Paper 84009, University Library of Munich, Germany.

    More about this item

    Keywords

    Commodity spot and futures markets; dynamic hedging; speculation; non linear GARCH; Markov regime switching;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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