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Threshold Autoregressive Models of the Commodities Futures Basis

Author

Listed:
  • Alfonso Gutierrez

    (University of Essex)

  • Jerry Coakley

    (University of Essex)

  • Neil Kellard

    () (University of Essex)

Abstract

The 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

Suggested Citation

  • Alfonso Gutierrez & Jerry Coakley & Neil Kellard, 2006. "Threshold Autoregressive Models of the Commodities Futures Basis," Computing in Economics and Finance 2006 323, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:323
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    More about this item

    Keywords

    Contango; normal backwardation; basis dynamics; TAR; convenience yield; agricultural commodities;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General

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