Hedging vs. speculative pressures on commodity futures returns
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.
|Date of creation:||10 Jan 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Manolis Kavussanos & Ilias Visvikis, 2008. "Hedging effectiveness of the Athens stock index futures contracts," The European Journal of Finance, Taylor & Francis Journals, vol. 14(3), pages 243-270.
- Wing H. Chan & Denise Young, 2006. "Jumping hedges: An examination of movements in copper spot and futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(2), pages 169-188, 02.
- Donald Lien & Yiu Kuen Tse, 2000. "Hedging downside risk with futures contracts," Applied Financial Economics, Taylor & Francis Journals, vol. 10(2), pages 163-170.
- Isabel Figuerola-Ferretti & Jesus Gonzalo, 2007.
"Modelling and measuring price discovery in commodity markets,"
Business Economics Working Papers
wb074510, Universidad Carlos III, Departamento de Economía de la Empresa.
- Figuerola-Ferretti, Isabel & Gonzalo, Jesús, 2010. "Modelling and measuring price discovery in commodity markets," Journal of Econometrics, Elsevier, vol. 158(1), pages 95-107, September.
- Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May.
- Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 535-551, December.
- 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 623-30, November.
- Sergio H. Lence, 1995.
"The Economic Value of Minimum-Variance Hedges,"
American Journal of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 77(2), pages 353-364.
- Chang, Eric C, 1985. " Returns to Speculators and the Theory of Normal Backwardation," Journal of Finance, American Finance Association, vol. 40(1), pages 193-208, March.
- Alizadeh, Amir H. & Nomikos, Nikos K. & Pouliasis, Panos K., 2008. "A Markov regime switching approach for hedging energy commodities," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1970-1983, September.
- René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
- Paul Cashin & C John McDermott & Alasdair Scott, 1999.
"The myth of co-moving commodity prices,"
Reserve Bank of New Zealand Discussion Paper Series
G99/9, Reserve Bank of New Zealand.
- Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
- Stephen Fagan & Ramazan Gencay, 2008.
"Liquidity-Induced Dynamics in Futures Markets,"
EERI Research Paper Series
EERI_RP_2008_01, Economics and Econometrics Research Institute (EERI), Brussels.
- Figlewski, Stephen, 1984. " Hedging Performance and Basis Risk in Stock Index Futures," Journal of Finance, American Finance Association, vol. 39(3), pages 657-69, July.
- Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
- Lescaroux, François, 2009. "On the excess co-movement of commodity prices--A note about the role of fundamental factors in short-run dynamics," Energy Policy, Elsevier, vol. 37(10), pages 3906-3913, October.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:28229. See general 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.